Choosing to incorporate your company might be one of the most advantageous moves you can make.
Although incorporating your company used to take a long time and cost a lot of money (due to the necessity to engage a professional attorney), the rise of third-party incorporation services has made this a more accessible choice.
This tutorial will explain how, why, and when you should consider incorporating your firm.
There are several reasons why you would desire to incorporate your company, including:
Unincorporated business entities (e.g., sole proprietorships or general partnerships) may find it difficult to get appropriate capital since many common lenders (including banks) see them as less reputable.
Furthermore, incorporating your firm means that you will be treated as a different legal entity from your company, allowing you to register as an employee and enjoy perks such as tax-deductible costs and a pension.
You will be personally protected from any responsibility that develops as a consequence of your company’s debt or behaviour since you will be a distinct legal entity to your business. This implies you won’t have to put your own assets at danger (i.e., your home or vehicle).
While this is not an absolute rule (and is subject to any personal assurances you make), it is unquestionably one of the most compelling reasons why you should incorporate your organisation as a small business owner.
It is quite straightforward to transfer ownership of an incorporated organisation to another shareholder or member.
When you transfer your shares in a corporation, you will be able to quickly sell, transfer, or give away your ownership in the firm when and if you decide to move on, without having to worry about the many legal issues that might arise when trying to do so in a General Partnership.
Corporations, unlike unincorporated business entity formations, have independent lifespans. They may operate essentially endlessly unless they cease (for example, due to insolvency) or combine with another firm.
Though there are several advantages to incorporating your firm, there are a few drawbacks:
With a corporation structure, you would face significantly more scrutiny from government agencies such as the Internal Revenue Service (IRS). This implies you’ll have to meet specific legal criteria for how you manage and document your company’s day-to-day activities.
Because incorporating your business implies that you and your company will be independent legal entities, your company will be deemed to produce revenues wholly separate from yours.
Profits earned by a company are thus taxed twice. Once at the corporate level (21%), and then again at the personal returns of shareholders (if dividends are distributed).
As a small business owner, knowing how to incorporate your company may be difficult and time-consuming, using time that might be spent making key management choices. It is also more costly than establishing a single proprietorship or a general partnership (especially when considering the lawyer fees that can be involved).
However, with the expanding availability of incorporation services, company owners may now depend on specialist third-party providers to manage their incorporation procedure without having to pay high costs to legal firms or tax advisors.
You may incorporate your company in three different methods.
If you prefer to manage your own incorporation, see our state-specific How to Start a Corporation guidelines for a comprehensive look at formation and compliance requirements. In general, though, you should adhere to the following guidelines:
If you decide to incorporate your company, one of the most crucial considerations you will have to make is which state you will incorporate in.
There is no legislation that prevents you from registering in any state (even if you do not operate there), therefore you may incorporate in any state or the District of Columbia.
However, it is normally suggested that you incorporate your firm in your home state. This is due to:
Keep in mind that incorporated structures are classified as “foreign companies” in all states other than the one in which they are formed. Foreign firms may be needed to get a Certificate of Authority depending on the state. This serves as a certificate allowing them to do business in that state.
The procedure of acquiring a foreign qualification is often more costly than the process of domestic incorporation, therefore company owners on a limited budget should bear this in mind.
Even if you do not “need” to incorporate your firm, doing so may provide you with monetary, financial, and personal advantages that will be quite beneficial regardless of your present size or capital.
The following are the advantages of incorporating a small business:
Realistically, you should weigh the advantages of incorporating your company and decide if they are “worth” the greater government scrutiny, operating expenses, and double taxes that would occur.