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.
Table of Contents
Why Should You Incorporate Your Company?
The Benefits of Incorporation
There are several reasons why you would desire to incorporate your company, including:
Enhanced Funding Options
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.
Protection from Liability
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.
Simple Transfers of Business Ownership
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.
Lifespan Indefinite
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.
The Drawbacks of Incorporation
Though there are several advantages to incorporating your firm, there are a few drawbacks:
Stricter Inspection
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.
Taxation twice
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).
However, there is one exception. S corporations are not subject to double taxation since all profits are distributed directly to the owners and taxed at their individual income tax rates.
Formation is an expensive and complicated process.
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.
How Do I Incorporate My Company?
You may incorporate your company in three different methods.
Hiring a third-party incorporation agency to help you with the formation of your business for a modest charge
Hiring a professional attorney to manage your company’s incorporation (this is commonly quite expensive.)
Including independently (this may be more difficult for first-time business owners)
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:
Contact the business services division of your state: They are in charge of overseeing the incorporation procedures of firms.
Determine your state’s needed paperwork, fees, and timetable for the process: This will guarantee that you do not make any minor (but critical) technical errors relating to legal regulations that are unique to your area.
Prepare your formation paperwork as follows: The specifics will vary depending on your location. While most of them are handled by incorporation service providers or specialist lawyers, you may be able to complete them on your own.
Create your bylaws: These are similar to LLC operating agreements in that they should provide detailed information about how your business will be run, how much responsibility each shareholder or owner will have, where (and how frequently) stakeholder meetings will be held, and how frequently dividends will be distributed.
Obtain state authorization: When your company is authorised, several states will mail you a Certificate of Incorporation.
In which state should I incorporate my company?
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:
In most cases, incorporating in your home state is less expensive and easier.
You will not be required to engage a registered agent in more than one state.
There would be no need for you to pay franchise taxes or submit yearly reports in more than one state.
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.
Should I Incorporate My Small Business?
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:
enhanced security
increased reputation and financing access
The ability to operate throughout the United States
The ability to safeguard your company’s identity (subject to state laws)
The ability to deduct some costs while still registering as a corporate employee
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.