Why Incorporate: Everything You Need to Know
Why incorporate? Becoming incorporated is both a legal and strategic way of operating your business and it also includes certain benefits.3 min read
Why incorporate? Becoming incorporated is both a legal and strategic way of operating your business. There are certain benefits to incorporating your business, including:
- It separates the business from the owners. Among other things, this can mean that if an owner has to file bankruptcy on a personal level, it does not affect the financial standing of the business. The opposite is also true: should the business become subject to a lawsuit, the owner’s personal finances are not at risk.
- Depending on the nature of your business, you may also find that you are able to deduct additional business expenses, by being incorporated.
- Simple credibility. While it may be basic psychology, seeing a business with “Inc.” after the name provides an added sense of faith or confidence in the business.
Different Types of Corporations
Perhaps you have decided that incorporating your business is the best or logical next step. Now, you need to decide, more specifically, what type of corporation you want to be, as there are a few different ways you could go:
- S Corporation: an S corp does not pay income tax. Rather the shareholders are responsible for claiming the profit or losses on their personal tax returns, which is known as pass-through taxation. In the United States, all owners or shareholders of an S corporation must be U.S. citizens or residents in order for the business to obtain this type of incorporation. Many people like S corporations as they see it as being a sound investment opportunity.
- C Corporation: a C corp does pay income tax and the taxes filed are separate from those filed by the individual owners or shareholders (It is also worth noting that there is no limit as to the number of shareholders a C corporation may have). Businesses are usually determined to be C corporations unless otherwise established as S corporations. Additionally, with a C corporation, a business has a greater possibility of growth through the sale of stocks.
- Limited Liability Corporation (LLC): unlike an S corporation, shareholders are not required to be U.S. residents. LLC’s are most common among those businesses that have a single owner, as (like an S corporation) it allows for the pass-through taxation, which is often appealing to sole business owners. Another thing that differentiates an LLC from other types of corporations is ownership (in the cases of an LLC having more than one owner) is not determined by shares or stocks that are bought and sold, but rather by units or percentages. For example, in an LLC, Joe owns 25% (typically based on what he contributed to the establishment of the company) versus saying that he bought a certain number of shares.
You have decided that establishing your business as a corporation is the right thing, and you have determined the type of corporation that will be best for you and your shareholders. So, what’s next?
One big factor to think about is where you should be incorporated, as it is not mandatory that businesses be incorporated in the state in which they operate. While many business owners do choose to incorporate in their home state, it can possibly save you money to incorporate in another state. The most popular states in which to incorporate include:
Should you choose to incorporate your business somewhere other than your home state, it will be considered a foreign business. While there may be certain tax benefits to doing so, you will want to ensure that all of your paperwork has been filed properly with the state and that you are always in compliance with that state’s business and tax laws. As such, it will be valuable to retain the services of an attorney that is based in that state who can assist and advise you in such matters. After all, you don’t want to end up being denied the ability to do business in that state or have it revoked. Additionally, you certainly don’t want to end up paying hefty fines or penalties for not being in compliance with state laws.
If you need help with incorporating your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.