Incorporation is one of several options you have when forming a business. Corporations aren't just big companies—they can consist of just one person.

What Does Incorporating Really Mean?

Incorporating creates a legal entity that is separate from yourself. An incorporated business has its own property, signs its own contracts and pays its own taxes.

A corporation is run by its directors and officers. Directors are elected by the owners (the shareholders) of the corporation and manage the big picture corporate matters like which market or business strategy the corporation should pursue. Directors are also in charge of appointing officers. Officers carry out the directors’ plan by managing the day-to-day operations of the corporation. Unless a shareholder is also a director, officer or employee, they play no other role in the business except voting on major corporate matters like who will be the directors or whether a company will accept an acquisition offer.

Why Is Incorporating Important?

  • Only in very rare circumstances are the owners of the corporation not personally liable for the debts of the corporation.

  • Corporations can sell stock to raise capital.

  • Having a corporation provides at least some level of legitimacy when dealing with customers and vendors.

Do Not Incorporate If:

  • You aren't willing to complete the legal requirements each year. Not complying with corporate formalities may eliminate corporate protections.

  • You won’t be able to manage separate business and personal bank accounts—this is required by law.

  • You don't want to pay corporate taxes and fees.

  • You perform all services professionally. Ask a local lawyer if corporate protections still apply.

Incorporate If You Want To:

  • Limit your personal liability.

  • Create a more credible and professional image.

  • Sell stock or give employee stock options (Please note: Anytime a corporation issues, grants or sells stock, it must comply with securities laws).

  • Make it easier to transfer ownership interests.

  • Create a business that has the ability outlive its original owners.

Deadlines for Incorporation:

  • You can create a corporation at any time. There is no deadline.

  • You must file annual reports with the state in which you incorporated and with the states in which the corporation is registered to business.  Deadlines vary by state.

  • You likely need to renew your registered agent on an annual basis.

  • Anything you do before incorporating does not receive corporate protections. Assets, debts and contracts signed before incorporating must be legally transferred to the corporation to obtain such protection; in some cases, such a transfer may not guarantee a release of liability.

Examples of Corporate Protections:

  • Personal injury lawsuits: A customer suffers a serious head injury when they slip on a wet floor. A court awards him $500,000 more than your business has. Without a corporation, the customer can get a judgment against your other assets—your house, car, boat, etc. With a corporation, the customer can only reach the business assets.

  • Business debts: Your business is $100,000 in debt when you decide to close it. Without a corporation, the debt becomes your personal debt. With a corporation (in most cases), the creditors can only claim remaining business assets.

How to Lose Corporate Protections:

  • Using standard forms that don't apply to your business needs.

  • Not properly maintaining corporate records like director or shareholder meeting minutes.

  • Mixing personal and business assets.

  • Forgetting to file periodic reports or pay required fees.

  • Not keeping adequate records of stock ownership.

These mistakes could "pierce the corporate veil." This is a legal term that means you lose personal liability protection.

Steps to Incorporate:

  1. Meet with a lawyer to decide if incorporation is right for you.

  2. If you decide to incorporate, work with an attorney on drafting and filing the articles of incorporation. To do this, you will need to:

    1. Designate a registered agent to receive legal papers,

    2. Select a unique name,

    3. Designate an incorporator,

    4. Submit the documents to the proper state agency (usually the Secretary of the State of incorporation), and

    5. Pay all relevant fees.

  3. Work with your lawyer on formalizing post-incorporation documentation, such as the action by sole incorporator, bylaws, unanimous board consent in lieu of first meeting, stock purchases (this can be tricky - consult with your attorney), and other needed agreements.

  4. Request an EIN (tax number) from the IRS.

  5. Select your tax status and fiscal year using IRS Form 2553.

  6. Create a checklist of what your state requires you to do each year to maintain your corporation.

To get the incorporation process started, request a free proposal on UpCounsel. UpCounsel connects you with the top lawyers in your area who can help you complete the legal work needed to properly form your business.