Business incorporation has the advantage of shielding company owners, principals or shareholders from personal liability in the operation of a business. Incorporation is a good thing to do in today's litigious world.
What Is Incorporation?
Incorporation allows you to set up your business in a number of legal formats. Incorporation offers tax and liability benefits and may make it easier to borrow or raise money to fund your company; however, it does cost money and requires a significant amount of paperwork. To decide if incorporation is right for your company, you should examine your tax obligations, liability risk, and other factors. For many business owners, incorporation is a good idea.
Incorporating Your Business
Decide on Type of Corporation
There are several formats for structuring your business including:
- C-Corporation: This type of incorporation provides extensive personal liability protections. One of the biggest benefits is that C-Corporations are taxed at the corporate level as a separate entity rather than as individual shareholders, although shareholders are required to pay taxes on any profits generated. This is known as double-taxation status. Filing for a C-Corporation can be a long process, taking up to two months depending upon the speed of review process by the secretary of state and county officials.
- S-Corporation: This structure is designed for smaller companies that do not have the issues of numerous shareholders to deal with, and limits the number of shareholders to 100. S-Corporations provide the same levels of liability protection, but avoids the costs of double taxations that C-Corporations have. Taxation is limited to personal income taxes of individual shareholders, but since most small business owners that opt for this type of incorporation are just starting out and may not show a profit for several years, it had the advantage of offsetting business losses against personal income.
- Limited Liability Company (LLC): This is a hybrid combining two elements: the benefits of a partnership and personal liability protections. Tax advantages of LLCs include business income and losses assessed against the personal incomes of the LLC's investors, also called members. Profits can be allocated at different levels to members of the LLC.
- Nonprofit Corporation: If your company deals with charity, education, or religious issues, you may benefit from incorporating as a nonprofit. The benefits include liability protection, continued existence even if the founders leave, and ability to receive grants. If you qualify for 501(c)(3) (tax-exempt) status, your company may also qualify for tax-deductible donations, exemption from property taxes, and reduced postage rates.
What type you choose depends on several factors such as the size of your company, the purpose of your organization, number of partners, and even the age of your company. Another factor is whether you want to be a public or private company and whether you want to sell stock to the public or keep the stock in-house.
Decide Where to Incorporate
Most people incorporate in the state they live in or where the majority of the company's business is performed; however, occasionally a company may decide to incorporate in a different state for other reasons like tax benefits. Remember that even if you incorporate in a different state, you still will likely have to incorporate in your home state in order to do business there as well.
Each state has specific requirements to incorporating. You will need articles of incorporation for most states but each state may require other documents to officially register your business. Check with your state to find out what paperwork is needed.
Pick a Name
You have to pick a name for your company. This can become complicated because you can't use a name that is currently being used by another company in your chosen state. The website of the secretary of state where you incorporate has a database that you can search to make sure that your company name is not in use.
It is possible to do business under a different name from the official one you register with the state; you can file "doing business as (D/B/A)" or fictitious name forms with the state or county.
Create Articles of Incorporation
To incorporate your company, you need to create a document called the articles of incorporation. This legal document typically includes information about the corporation like the name of the business, the purpose, the address, and the number of shares that will be issued, but complete requirements may vary by state.
Write Corporate By-Laws
Many states require that you also complete a document explaining your corporate by-laws in order to incorporate. This document lists the rules and regulations of your company along with the organization of company officers and the board of directors. The by-laws should include statements about how your company will function, how officers are selected, bookkeeping information, and the duties of all involved.
An attorney can help with this document but you can also find a template online that you can fill out relatively quickly.
File Paperwork with State
Once you complete your articles of incorporation, you can submit them to the secretary of state's office - either through the mail or online - along with your payment. The price varies according to state; the state website will tell you the cost.
If your paperwork is approved, you will receive a document called a Certificate of Incorporation. If there are questions or you need to submit additional information, the state will give you the opportunity to do that.
Should You Incorporate?
Incorporating is not that difficult but making the decision sometimes can be. Here are some things you should consider when you are making this choice; an attorney can also help you assess the best steps for you if needed.
Benefits of Incorporation
Business incorporation can offer:
- Employee benefits including medical, life and disability insurance at fully taxed rates
- Ability to raise capital by selling shares of stock
- The business owners can easily transfer company ownership
- Corporate discounts when purchasing supplies and materials
- Presentation of a strong and stable corporate image in the business community
- Recruitment of better qualified employees
- The corporation can also last beyond the lifetime of the original founders
Downsides of Incorporation
Downsides of business incorporation include:
- The cost of filing and maintaining incorporation
- Dealing with regulations required by state and federal agencies
- Shareholders have to be satisfied by company performance to prevent them from filing lawsuits to remove you as owner or CEO
- You must also maintain stricter accounting methods that can satisfy IRS requirements
Even if your business is home-based, incorporating may give you some benefits that other business formats may not. You have to look at your business, liabilities, and tax issues and determine if incorporation in best for you.