One of the most important questions you need to answer as a small business owner is whether you should incorporate your business—and if so, how.
Here, we’ll explore why you would want to incorporate your business, and how to do so, with helpful links to resources across different U.S. states.
About business incorporation
What does “incorporated” mean?
It’s the process of converting a sole proprietorship or general partnership into a separate entity in the eyes of the law (i.e. the state you’re operating in) and the public.
In other words, by incorporating your business, it becomes a separate legal entity from you, the business owner, or any other individual involved.
Is incorporation right for you?
The setup itself involves fees and plenty of hoop jumping. More importantly, it introduces extra guardrails and responsibilities for your business. The benefits, however, often outweigh these costs.
“The first thing you’ll need to consider before incorporating is whether structuring your business as a corporation is the best way to serve your vision for your company,” explains a business structure analysis from Forbes. “There are 4 major business structures available to you. Have you carefully considered the pros and cons of each? Corporate structure is attractive if you’re interested in issuing shares in your business, you are anticipating a rapid and far-reaching expansion of your enterprise, and/or your vision is best served by a rigid managerial hierarchy.”
What are your business goals? Keep them in mind as you read through the rest of this post. It’ll help you gauge whether you should incorporate, or go with another structure such as a partnership or a limited partnership.
That brings us to our next question: If you are planning on incorporating your business, should you classify it as an S corp or a C corp?
S corp vs. C corp
When incorporating your business, you can do so as an S Corporation or a Corporation.
A C corp is the more standard incorporation, while an S corp comes with specific tax advantages. C corps pay corporate-level federal taxes, while S corps do not—their taxes are instead passed down to shareholders.
That is the primary difference between S and C corps—how they are taxed.
When determining which is better for you, there are two main factors to keep in mind:
- S corps come with more tax advantages for small businesses, but with that, come with more limitations.
- Owners of a C corp are subject to double taxation (at the corporate level and then at the personal income level) but come with no limitations.
If you own a small business and don’t see it growing beyond 100 shareholders, an S corp is likely the right option.
If you’re fond of catering to unlimited growth, a C corp is likely the better option.Thomson Reuters provides an in-depth breakdown of S and C corp pros and cons to help you determine which is right for your business.
How to incorporate a small business
If you decide that incorporation is your best route, you’ll need to follow a strict process to make it happen. There is no universal checklist available, as the details vary from state to state. But here are some of the key steps that nearly all entrepreneurs will need to accomplish in order to become the proud owner of an incorporated business.
1. Choose a Business Name
It’s essential to find a name that isn’t just memorable and effective, but available. Visit your state’s online database to make sure that your preferred name hasn’t already been taken. Review the U.S. Patent and Trademark database as well to check on any overlapping trademarks.
Typically, you can search your state, plus either “business entity search” or “corporation search,” and you’ll find the necessary search tool to look up existing businesses in your state.
Example corporation search pages:
2. Set up governing documents
This step is where you create the road map for how your business will handle its business. You often aren’t required to submit these documents to the state, but they’re essential when it comes to things like handling profits or navigating disputes.
You can pay an attorney to help with your governing documents, but the most cost-effective route is to use one of the free bylaw templates that you can find online.
3. Make it official with paperwork
Here’s where you let the state know what you want your business to be called, as well as contextual information such as the business’s purpose, directors, officers, and mailing address.
Most states allow you to file your articles of incorporation online. You can also print off hard copies and then submit them by mail, but this approach will always take longer. Once everything has been reviewed and approved, you’ll receive a confirmation from the state that your business is now its own legal entity.
Similar to an entity search, you can simply search your state, plus “articles of incorporation,” and you’ll find the documentation you need.
Articles of incorporation by state:
4. Gather for a meeting
Once your articles of incorporation have been approved, you must hold a formal meeting. A top priority of this event is to record information on how your business was funded. This means the names of each person must be written down and the percentage of their ownership noted.
Be sure that you don’t conclude the meeting without also getting everyone to sign the business’s bylaws. If you have any resolutions to bring to the group, this is also the time to get them approved.
5. Secure an EIN
Even if your business has no employees, it likely needs an Employee Identification Number (EIN). You can learn more about EIN requirements and easily apply for your own by visiting this application page created by the IRS.
As mentioned earlier, your state may have some other unique requirements for incorporation. But once you’ve completed these 5 steps, you’ll be ready to start enjoying the benefits of incorporation.
The benefits of incorporating your small business
Let’s look at some of the primary perks of incorporating your small business:
Protecting your personal assets
Since your business is declared as its own legal entity, your personal assets are protected in the case of any legal or financial issues. If assets were to be claimed at any point, it would only be the business’ assets, not the owner’s.
Establishing business credit
There’s now a clear delineation between your personal finances and business finances. That separation helps your business begin its own credit history rather than being attached to your personal credit history.
Raising capital easier
You’ll be able to issue shares of company stock to potential investors that you otherwise wouldn’t have access to as a sole proprietorship. Also, banks typically prefer to lend to an incorporated company over sole proprietors.
Building credibility with customers and community
Say you did business with a company and they needed to give you a check. You look at that check and see that it’s from the CEO’s personal account and bears their personal information. How professional do you think that company is now? When you incorporate your business, you’re proving your credibility and professionalism as a business entity—and communicating your business intentions, even if in a non-direct way.
Incorporation can lead to success
Taking the time to incorporate your business could help you immensely in the long run. Weigh your options and then take the necessary steps to become the type of business you want to be. It may take some time and effort to complete the process, but you’ll be glad you did.
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