Choosing how a business is organized may be one of the most important decisions a business makes. Incorporating is often the wisest decision for small business owners. Some of those benefits are saving on taxes, protecting personal property, and letting customers know they’re giving their business to a legal, established company. Each business should carefully assess the benefits, as well as the challenges, of incorporation before moving forward.
Here’s how to incorporate the right way:
Know the difference between an LLC and a Corporation
LLCs and Corporations are two of the most popular entities to form. The both have their own set of benefits and detriments, and it’s definitely worth it to do your fair share of research prior to picking which one is best for you and your business.
Forming a limited liability company (LLC) provides benefits for lots of different types of business. Some of the most popular are: real estate, consulting firms, and partnerships. LLCs have a reputation of being the “simple” entity. The startup is easy, and the management structure itself is pretty simple. There’s not a lot of paperwork and hassle that goes into starting and running an LLC. Additionally, they’re pretty inexpensive to start compared to some of the other options available to small business owners.
Other benefits include: protecting your personal assets through liability protection (as with the Corporation), having the ability to deduct certain expenses, reducing your audit risk, and establishing credibility with customers. Maybe one of the biggest draws of the LLC is the pass through taxation. LLCs are independent legal entities but not independent tax entities (i.e. income tax for LLCs are reported and paid on the owners’ personal income tax returns). So they are taxed only at one level, where corporations experience double taxation, once at the company level and again at the owner.
Forming a corporation is more extensive than forming an LLC. Not only will you be filling out more paperwork, but you have to pay special attention to the language of the paperwork. For example, if your corporation will be engaging in what your state might call “professional services,” the Articles of Incorporation must bear special language and the corporation must be formed pursuant to certain statutory provisions. “Professional services,” according to most states, usually consist of: medical services, legal services and representation, accounting and financial services, architectural services, among others- depending on your state of incorporation. It is important to note that most states vary in their requirements regarding licensing of professional activities. So it’s always a good idea to seek the advice of an attorney if you fall within the “professional services” statute of your state. Like an LLC, forming a corporation draws a line between the owner’s personal and business assets, helping protect your personal assets from risks or debts associated with running a business. This means that if the business can’t pay a creditor or gets sued, the creditor cannot legally come after the member’s personal assets such as their house or car.
The management of a corporation is a little different than the management of an LLC, too. The owners of the corporation are called shareholders. The directors are responsible for long-term management and make the major decisions regarding the corporation. The officers are responsible for day to day operational activities of the corporation and usually consist of the president, secretary, and treasurer. Corporations also have stock options. You may choose to incorporate your business to raise capital and offer stock options to employees. Additionally, when you incorporate a business, you can have unlimited shareholders.
Know the steps to take after you Incorporate
Apply for an Employer Identification Number. An EIN is going to be needed if you want to open a business bank account, or if you want to hire employees.
Look into what business licenses you have to apply for. Licensing varies depending on locality, entity, and industry, so it is a good idea to consult with a professional who can help you figure out exactly what you need.
Remember to stay on top of annual maintenance. Most states will require business entities to file an annual report, which will have some basic information on your business like its name, address, registered agent, and industry. You also have to document any changes to the corporation or LLC. If you bring on new owners, or new investors, make sure to make note of it. You should also update your operating agreement or bylaws as new owners and investors will probably want a say in how the company is run.
Thinking about expanding outside of your home state? Well, remember that you have to apply for permission to do business in any new state. If you don’t, you could be looking at hefty fines and dissolution of your business in that state. So don’t forget to file to qualify as a foreign entity in any state you plan to expand into.
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About this author
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA, and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Google+ and on Twitter @mycorporation.