How to Incorporate a Business – 6 Steps to Know
Wondering if your business should become a corporation? It’s an important decision to make. Many choose the route of business incorporation for one of three reasons: to limit personal liability, to sell the business, or to attract outside investors. Whatever you’re planning, it’s critical to know the facts, because there are both benefits and challenges to becoming incorporated. Let’s walk through how to incorporate a business and the benefits of incorporating.
What Does It Mean to Incorporate Your Business?
Incorporating a business means turning a sole proprietorship or general partnership into a company formally recognized by your state of incorporation. When a company is incorporated, it is a separate legal entity from its owners. Corporations can acquire property, sign contracts, have bank accounts, and file lawsuits. You’ll know for sure that a company is incorporated if you see the “Inc.” after the company’s name. Some organizations use “Corp.” after the name, which can mean that it’s incorporated but not guaranteed.
There are also other legal business structures with varying titles, such as LLC or S Corp. These are indicative of different legal protections and tax obligations. Business owners should consider these when determining the best option for their company.
LLC vs. Inc.
LLC stands for “Limited Liability Company” and is a common business classification. Both LLCs and incorporations protect their owners from personal liability. However, they are different in how they are owned, managed, and taxed. They also have different record-keeping and reporting requirements.
A few primary distinctions include:
- Corporations issue stocks to shareholders, which can be easily transferred. LLCs, on the other hand, have members who own percentages of the company that are more difficult to transfer.
- Corporations with 100 or more shareholders may face double taxation by paying at both the corporate and personal shareholder levels. LLCs can be taxed as sole proprietorships and partnerships, meaning just at the personal level.
- Because corporations have a greater responsibility to their shareholders, they have more record-keeping requirements than LLCs.
C or S Corp vs. Inc.
Any business using the “Inc.” title can be a C or S Corporation. Determining if a business is a C or an S corp depends entirely on what is filed with the IRS.
C Corps are the standard and most common form of corporation for large entities. They typically have 100 or more shareholders and face double taxation. C Corporations are ideal for many large businesses, as they can provide more flexibility than LLC and S Corp structures.
S Corps have 100 or fewer shareholders and can avoid double taxation. They are pass-through business types, which means they pay no corporate taxes, as these are passed on to the owners, making them very popular for small to medium size organizations. For these entities, shareholders report business profits and losses on their personal tax returns.
What Are the Benefits of Incorporation?
There are many attractive benefits of incorporation, including:
- Limited Personal Liability: In most situations, a corporation’s owners will not be held liable for its business debts and obligations.
- Credibility: Using the “Inc.” title increases a company’s legitimacy. Consumers tend to have more trust in incorporated businesses.
- Name Protection: In most states, your business name cannot be used by any other organization.
- Continuity: A corporation will continue to exist, even if its ownership changes. Meanwhile, sole proprietorships and partnerships cease to exist if an owner leaves.
- Deductible Expenses: Corporations can deduct business expenses before they allocate income to shareholders.
What Are the Steps to Incorporating a Business?
Becoming incorporated is a relatively straightforward process, but there are a few key steps to follow carefully.
1. Choose a Business Name
The first step is to find a unique name that isn’t already in use. The name can’t be misleading, and it can’t be too similar to any existing business names in your state. To make things easier, all 50 states have an online database where you can find out if the name you have in mind is already in use. You can typically find this on your secretary of state’s website.
2. Develop Governing Documents
When starting a corporation, governing documents are called bylaws. Corporate bylaws are for internal use and serve as formal guidelines for how your company will handle disputes, ownership percentages, dissolution, losses, profits, and more. Discuss these operating documents with any fellow co-owners to make sure you’re all in agreement.
3. File the Paperwork
In most states, you can download the Articles of Incorporation online. Depending on your location, you can also file your forms in person, by fax, by mail, email, or online. The information required to fill out the forms varies, but it typically includes your company’s name, mailing address, purpose, and the names and addresses of your corporation’s directors. Most states provide clear instructions for filing, but if you run into trouble, you can contact the agency (typically the secretary of state’s office) for assistance.
4. Hold a Meeting
This meeting is to document the funding of the corporation. It is important to record the names of the people who exchanged assets for partial ownership, as well as how much of the company each person owns. This is usually added to the bylaws and signed by all of the members in agreement.
5. Obtain a Tax ID Number
At this point in the process, most businesses will need a federal employer identification number (EIN or FEIN). Owners can easily apply for an EIN online at the IRS website with a social security number, business entity information, and predetermined fiscal year dates. Don’t worry — the form is short and the information needed is simple.
6. Securing Necessary Permits & Licenses
This is the last stop to incorporate your business. Certain types of businesses will need to obtain the proper permits and licenses to legally operate. For example, contractors may require license bonds. If stock is being sold, businesses should consult the federal securities regulations.
Business incorporation can be an exciting next step for your company, and knowing how to incorporate a business properly can save you a lot of headache on your journey. Surety First can also save you time and money when it comes to getting your business properly bonded and insured. Whether your company needs workers’ compensation insurance, a general liability bond, or other type of bond or insurance, we make the process quick and simple.
Get started by requesting a quote, and we’ll take it from there.
A note from the author: The content discussed in this article is for informational purposes only and does not constitute legal or tax advice. Please consult with a qualified legal and/or tax advisor to learn more about what legal entity best fits your needs.
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