1. Steps for Incorporation
2. Reasons for Incorporation
3. Choosing a Business Entity

To incorporate a person, the individual must create a separate business entity for his or her sole proprietorship. This is often done to protect personal assets from the debts and liabilities of the business. This type of incorporation is allowed in all U.S. states. The person who forms a business of this kind is known as the incorporator.

Steps for Incorporation

  • Decide on the state where you want to incorporate. Although this can be your home state, it might not be the most affordable choice. States like Delaware and Nevada provide tax advantages for small business owners. Keep in mind, however, that you must have an active office in any state where you choose to incorporate.
  • Choose a name for your business. Although requirements vary by state, you may not choose a name that is too similar to the name of an already-registered business. In most cases, you must add the word Inc. to your business name. The secretary of state in the location where you are incorporating can provide more information about name requirements.
  • File the articles of incorporation, which includes information about your business, stock shares you plan to issue, location, purpose of the company, and other pertinent details.
  • Pay the required fee, which varies by state.
  • Name a chief financial officer, president, director, treasurer, and/or designated shareholder depending on the requirements in your state. As a sole proprietor, you can opt to fill all required roles or hire assistance.
  • Choose a registered agent. This person must have a physical address in the state where your business is registered and take responsibility for receiving legal paperwork on your behalf. You can act as your own registered agent.
  • If required by the state, issue stock certificates to yourself as the founder of the company.

Because these steps vary by state, you should contact the secretary of state where you plan to incorporate for official guidelines and forms.

Reasons for Incorporation

By incorporating yourself, you create a separate legal entity for your business that separates your personal affairs and finances from those of your company. You are protected by a structure called the corporate veil as long as you keep your business and personal assets separated. In addition to limited liability protection, the corporation will file and pay separate income taxes. You can pay yourself a salary as a business owner or take dividends from the profits.

You can also take advantage of tax deductions and savings as an incorporated business. Because you are only able to deduct about $12,000 of business expenses on your personal tax return, you can establish a sole proprietorship or corporation to deduct the actual cost of running your business. A sole proprietorship is often the best choice for small businesses without substantial assets. You can also choose a limited liability company (LLC), which protects your liability in the same way as a corporation.

You can also take advantage of the reduced taxable amount for businesses. The cost of establishing a legal business entity is several hundred dollars in most states plus small annual registration fees.

Choosing a Business Entity

A sole proprietorship simply involves establishing a fictitious (DBA) name for your business. This is the easiest and most basic type of business entity and allows you to deduct your business expenses without the need for an accountant.

When two or more people form a business, they can establish a partnership. This can be structured in various ways depending on state laws and the level of desired personal liability protection. The level of limited liability of a partnership is less than with a corporation, but taxes are also lower. A partnership is a pass-through entity, which means profits and losses are reported on each individual's personal tax return.

An LLC provides advantageous taxes along with limited liability protection, which makes it a good compromise between a corporation and a partnership.

Corporations may be categorized as either an S or C corp. The former can have no more than 100 shareholders and offers personal liability protection while maintaining pass-through taxation. On the other hand, a C corp offers the highest level of personal liability, but much higher taxes as well. Corporate profits are taxed at both the business and personal levels.

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