When beginning a business, it is important to consider whether or not you should incorporate. Small business incorporation typically occurs when business owners are seeking to limit the extent of their personal liability. There are numerous ways that a small business may incorporate. The most common types of corporations include, but are not limited to the following:
- Business Corporation: A business corporation is simply a corporation that is formed in order to engage in commercial activity for a profit. Business corporations are also commonly referred to as a “for-profit” corporation;
- Non-profit Corporation: Unlike a for-profit corporation, non-profit corporations are formed to carry out an education, religious, charitable, literary, or scientific purpose. Because the corporation is nonprofit, they are typically granted special tax treatment;
- S Corporation: An S corporation is a closely held corporation that is formed in order to allow the business owners’ income to be passed through the shareholders rather than taxed through the corporation. Setting up an S corporation is worth considering for tax avoidance purposes; and
- Professional Corporation: Professional corporations (“PC”), also known as professional service corporations (“PSC”), are corporations that provide services that require a professional license. Professional corporations are often formed by lawyers, engineers, physicians, public accountants, or architects.
In order to incorporate as a small business, the business must first file the required paperwork with the Secretary of State’s office in the state in which they intend to incorporate. Although forming a small business corporation is not often complicated, maintaining the business as a corporation is often not as simple.
As can be seen, there are a variety of different ways in which businesses choose to incorporate, and a variety of different reasons small businesses often do incorporate.
Do I Need to Incorporate My Small Business?
In order to decide whether or not you should incorporate your small business, you should understand the general reason for incorporating a small business. Once again, the most general reason for incorporating a small business is for liability protection. For instance, if your business is sued as a result of an accident that occurred while operating the business, you as the business owner will be personally reliable.
This means that your personal assets such as your home, vehicle, personal property, or even your life savings may be in jeopardy.Without incorporation, a small business owner is personally liable for any business debts. Therefore, if you are seeking to limit your personal liability, forming a business may be a great option for you.
Other advantages to incorporating a small business include:
- The ability to raise capital from investors through the sale of business equity or stocks;
- The ability to transfer ownership;
- The availability for tax deductions or tax breaks, dependent upon the type of incorporation formed; and
- The ability for the corporation to remain after the original business owner or investor passes away or moves on. Importantly, there is no limit to the life of a corporation.
It is important to note that there are also disadvantages to forming a corporation, such as:
- Double Taxation: Depending on the type of corporation formed by the small business owner, both the corporation and the shareholders may be liable to pay taxes. The corporation will be liable to pay taxes on its income, while the shareholders are then liable to pay taxes on their personal income received as dividends. Thus, the income taxes for corporations may be taxes twice; and
- Upkeep Costs: As mentioned before, retaining corporate status is not simply and requires corporations to follow certain rules and procedures such as holding annual meetings for shareholders and directors, preparing and filing corporate taxes, keeping corporate funds separate from personal funds, and keeping detailed records of all transactions and business decisions. Often this requires hiring additional staff to maintain the business as a corporation.
How Do You Incorporate a Small Business?
As mentioned above, incorporating a small business is usually not a complicated process. Generally the steps are as follows:
- The first step in incorporating a small business is often the most enjoyable, picking out a name for the corporation. The name must be unique and not in use by another corporation in the state. Therefore, once you have decided on a name, you should search the Secretary of State’s website to ensure the name is not taken;
- After deciding on a name, the next step is to draft the articles of incorporation for the corporation, pay the required fees, and file the articles of incorporation with the Secretary of State’s office. The articles of corporation contain numerous different aspects of running a business, such as what type of formation you are seeking to form, the purpose of the corporation, the identities of those forming the corporation, where the principal office is located, etc;
- After the articles of incorporation have been filed, you must select a board of directors for the corporation and hold your first meeting;
- At the first meeting, you will then approve the bylaws of the corporation;
- Next your business may choose to issue stock for the corporation; and
- Finally you will obtain an employer identification number (“EIN”) from the IRS so you can file annual taxes for the corporation and/or hire employees.
Do I Need a Lawyer to Incorporate My Small Business?
As can be seen, there are numerous advantages in small business incorporation. Additionally, it is entirely possible to incorporate your small business on your own. However, incorporating a small business is not often as easy as filing paperwork with the Secretary of State’s office, especially if you are wishing to form a corporation to avoid certain tax liabilities.
Should you need assistance with incorporating a small business, it is in your best interests to consult with a well qualified and knowledgeable corporate attorney in your area. An experienced business attorney will be able to inform you of your State’s rules on incorporation, as well as provide you guidance on whether or not incorporation is right for your business.
Should incorporation be the right choice for your small business, an experienced business attorney will then be able to prepare the necessary paperwork and ensure the proper paperwork necessary for incorporation is filed. Additionally, an attorney can ensure your business remains in compliance with state law for years after the initial incorporation.