How to Incorporate Yourself

If you run a small business on your own, there may come a time when you need to know how to incorporate yourself. Here's what you need to know about this process and why it may be beneficial for sole proprietors.

Should I Incorporate Myself?

As a business owner, incorporating your sole proprietorship may lead customers and other stakeholders to take your endeavor more seriously, improving credibility with clients and the community. Becoming a corporation also protects your personal assets from business liability. It can also make it easier to get business financing and make it easier to keep personal and business income and assets separate. This is a benefit at tax time as well.

While some individuals believe they can't incorporate a sole proprietorship, it's actually possible to do so. The first step is to check whether your business name is available for use in your state. Each of the 50 states has an online database for this purpose. Check the secretary of state website for this tool. If your name is taken, you can continue to search until you find a name that is available.

Self-incorporation is a long process with different forms to complete depending on your specific situation. If this paperwork is not done correctly, it can be detrimental to the incorporation process and take you away from actually running your business. For this reason, consult with an expert when you decide to incorporate your sole proprietorship.

Let an Expert Help Incorporate You

Consultants often decide to incorporate to protect their personal and business assets. As the incorporation process can be complicated, you might want to seek the help of an expert. There are many attorneys on the UpCounsel marketplace who could help you to incorporate yourself. Expert advice will help you save time, get credibility for your business, and protect your assets. They can also answer all your questions. For example, you might be wondering if you should incorporate your business in a different state from the one you live in, or how you should structure your business. An attorney can provide the legal advice you need during this process.

Create Your Governing Documents

The documents that govern a corporation are called bylaws, and for an LLC, they are called operating agreements. These are kept for internal use only and do not need to be filed anywhere. However, they will provide formal guidelines for your corporation that govern handling disputes, losses, dissolution, profits, ownership percentages, and all other aspects of how the business is managed. If the corporation has more than one owner, you'll need to collaborate on the governing documents to make sure everyone agrees. These documents are less vital, but still important, if you have a sole proprietorship.

File the Paperwork

Most state websites allow you to download a copy of the articles of incorporation as a PDF, along with detailed instructions on how to fill out these forms. You can submit them online, by mail, via email, via fax, or in person, though some states do not offer one or more of these options. Online filing is usually the best option when available. Most systems explain each step as you proceed through the online form. For this reason, online filings are usually approved.

The type of information required varies by state but typically includes:

  • The company's name and address
  • The name and address of the registered agent
  • The purpose of the business
  • Contact information for any officers or directors, which for an LLC are called members and managers

Never leave parts of the form blank. If you have questions, call the agency for your state. They have staff that will take your call and help answer your questions.

Once your paperwork has been filed, you'll receive a confirmation. In most cases, your LLC should be formed in your state of residence, but there are legitimate reasons to create an LLC elsewhere. This is why it's important to consult an experienced attorney.

Hold a Meeting

After your paperwork is filed, your LLC or corporation will need to hold a meeting to document its funding. Each person who invested in the new company, the amount of service, assets, or money they donated, and their ownership percentage should be recorded in the bylaws or operating agreement.

If you have an LLC, the investors are given memberships certificates. For a corporation, they receive stock certificates. All of them receive a copy of the signed agreement or bylaws as well as any initial resolutions passed at this meeting.

Obtain an EIN

Every business is required to file for an EIN (Employer Identification Number). This is relatively easy to do online; when you do so, you'll also receive your business tax ID number. The IRS online form gives prompts that help you fill it out correctly. You can also file the form, SS-4, via mail or fax. The form is only one page and asks for the type of business you formed, the current fiscal calendar year of your business, and your Social Security number.

Incorporating for the Wrong Reasons

If your business is not your main source of income and you have a full-time job as a salaried employee, you will likely pay more money in taxes if you incorporate. You do not need to incorporate to make business deductions. Keep in mind that you cannot deduct expenses unless they are made during the course of business and are reasonably considered business expenses. Deducting personal or other expenses is considered tax fraud. This crime carries high penalties and fees and has a long statute of limitations. While minor tax violations rarely come with criminal convictions, this often happens to repeat offenders.

Incorporating for the Right Reasons

As a self-employed, small-business owner, incorporation separates your business from you as an individual. Professional corporations (PC) cover accountants, doctors, lawyers, and other professionals by protecting them from liability from actions of members of their professional group or partners. However, you are still responsible for your own malpractice, though your personal assets are protected. Business debt is incurred by the corporation, not by individual members or partners. For this reason, it's especially important to incorporate if you are wealthy or if there is substantial risk involved in your business venture.

Incorporation also carries tax benefits like deductions for:

  • Entertainment and travel
  • Education benefits
  • Life insurance
  • Health insurance
  • Retirement plans
  • Dependent care assistance

When you incorporate, you don't own the business directly, but shares of the business in the form of stocks. Commingling, or mixing business and personal assets, is cause to lose your limited liability. Because the corporation must pay income tax, you might be double taxed on your income.

If you need help incorporating your sole proprietorship or small business, post your legal need at UpCounsel. Our marketplace accepts only the top 5 percent of lawyers who have graduated from prestigious programs such as Harvard Law and Yale Law. UpCounsel attorneys have an average of 14 years of experience representing companies like Google, Stripe, and Twilio.