How to Incorporate a Business: Everything You Need to Know
Incorporating simply means creating a new corporation under the laws of the specific state in which you incorporate. 3 min read
2. Benefits of Incorporating a Business
3. Disadvantages of Incorporating a Business
4. Frequently Asked Questions
What is Incorporation?
Incorporating simply means creating a new corporation under the laws of the specific state in which you incorporate. Incorporation can also refer to the formation of a Limited Liability Company (LLC).
Benefits of Incorporating a Business
There are several benefits to incorporating your business, which include the following:
- Incorporating allows you to protect your personal assets. The business’s debts and liabilities are kept separate and cannot affect the owner of an LLC.
- A business that is incorporated can file lawsuits and buy/sell property.
- Incorporation even means that the company can commit a crime, i.e. tax fraud or another type of business crime.
- Incorporating is simple. Simply file an application within the specific state where you wish to operate.
- Customers may prefer to purchase goods or services from a company operating with “Inc.” or “LLC.”
- All 50 states, including the District of Columbia, recognize both LLCs and corporations.
- A corporation can avoid double taxation of its profits and dividends by choosing Subchapter S tax status.
- Corporations can deduct normal business expenses before they apportion income to owners.
- Corporations can easily transfer ownership through a transfer of securities to the new owner.
- Corporations can operate for an unlimited period of time.
- Corporations can create tax benefits but C corporations might be exposed to double taxation of profits.
- Those businesses set up as S corporations can pass income to the shareholders.
- The IRS generally taxes corporations at a reduced tax rate than individuals.
- Corporations can issue shares of stock.
- A business that is incorporated can take its company public.
Disadvantages of Incorporating a Business
While there are several benefits to incorporating your business, there are a few disadvantages to keep in mind, which include:
- Corporations must have meetings on a yearly basis in which the owners must follow specific formalities of such meetings.
- Corporations are more costly than partnerships and sole proprietorships.
- Corporations require regular and ongoing filings with the state, including fees associated with these filings.
Frequently Asked Questions
Why should I incorporate my business?
As previously mentioned, there are several benefits to incorporating your business. Most important is the fact that corporations offer protection of your assets. Corporations also allow their owners to separate their personal assets thus protecting them from personal liability over the corporation’s debts and liabilities.
Where should I incorporate?
The state where you choose to incorporate is entirely up to you and your business needs. It will be cheaper to incorporate in your home state. More specifically, if you incorporate in your home state, you are not required to pay franchise taxes or file yearly reports in more than one state. However, most business owners choose to incorporate in the state where they intend on operating the most. For those businesses operating in multiple states, you can incorporate in one state and then register in those additional states, meaning that you will then be required to register, file annual reports, and pay annual fees associated with each state’s requirements.
- How do I incorporate my business?
- Contact the state’s secretary of state that is responsible for registering corporations.
- If you choose to hire an attorney, you can. However, with a little guidance from various literature, you can do so on your own, which will save you money.
- Prepare the articles of incorporation, which could cost roughly $80-100 each.
- Choose a business name, but keep in mind other requirements when choosing a name, including not being able to use words associated with the federal government, i.e. Federal, Reserve, Bank, United States, etc.
- File a Statement of Information form (depending on the state).
- After registering with your respective state, you’ll need to register with the IRS and obtain an Employer Identification Number (EIN).
- A corporation will need to create bylaws that specify in detail how the corporation will be run.
- Choose a board of directors.
- Draft a shareholder’s agreement.
- Hold a meeting where you will go over all important decisions regarding the daily operations of the business, including a tax accounting method, appoint officers, incorporate and adopt the bylaws, issue shares of stock, as well as other key topics to be discussed during the meeting.
- Should your business be issuing shares of stock, you should not open your doors for business until you do so.
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