When a business organization incorporates, it creates an entity (or “person”) that is separate and distinct from its owners. Corporations have tax, liability, and other advantages. Some common types of corporations are:
- For-profit (or business) corporations,
- Non-profit corporations,
- Private corporations,
- Professional corporations, and
- S corporations.
While most people associate corporations with large, multinational businesses, small business also can incorporate.
What Steps Are Required to Incorporate a Small Business?
Each state has its own incorporation laws and procedures. However, you typically must draft a series of documents, including articles of incorporation and bylaws, and pay a fee. You also must designate a corporate name, including a legal ending (such as “Inc.,” “Corp.,” or “Ltd.”).
1. Articles of Incorporation
Articles of incorporation establish your corporation’s existence. (Sometimes, this document is called a “charter,” “certificate of incorporation,” or “letters patent.”) You must file your articles of incorporation with your state’s business agency. Typically, it must include:
- Your business’ purpose,
- Your principal place of business,
- Your registered agent’s contact information (A person who accepts legal and other important documents for your corporation), and
- The number of shares and type of stock you intend to offer.
Your state may offer a standardized form, or a business lawyer can draft your articles of incorporation from scratch.
2. Corporate Bylaws
Most (but not all) states require corporate bylaws. However, even if your state does not require them, it may be in your best interest to draft formal bylaws. Bylaws document your corporation’s policies and procedures and help with corporate compliance. They may discuss:
- The operation of your board of directors,
- Dates and procedures for annual shareholder meetings,
- Voting rights and guidelines, and
- How shareholders are notified of special meetings and other important information.
Your bylaws should clearly set out how your corporation will operate. If you need help drafting bylaws that comply with state and federal laws, contact a business lawyer.
3. Pay Fees and File Paperwork to the Secretary of State
If you’re incorporating a business, then you’re already familiar with your Secretary of State. Make sure you file the paperwork, pay the necessary fees, and take any other steps that your state might require you to complete.
You must also register your incorporation with the Internal Revenue Service (IRS) and be sure to file the correct form based on the type of incorporation.
What Are the Benefits of Incorporating a Small Business?
There are many pros and cons to incorporation. Some of the benefits include:
- Limitations on personal liability: Corporate shareholders typically are not personally liable for corporate debts (including judgments from a lawsuit). In other words, someone cannot seize your personal assets to pay a corporate debt.
- Transfer of ownership: Ownership rights in a corporation are easily transferable.
- Tax benefits: Corporations are a separate tax-paying entity that may be eligible for increased deductions and reduced self-employment taxes.
- Continuity of existence: Corporations do not end with the death or incapacity of a shareholder. Instead, they have “perpetual existence” (ending only when the shareholders end the corporation). Some investors prefer this level of stability.
- Credit scores: Corporations build their own credit rating and amass their own credit scores using corporate credit. (Individual shareholder’s credit ratings generally do not affect the business’ credit score.)
- Centralized management: Corporations typically must have a clear management structure, including a Board of Directors.
Do I Need a Lawyer for Incorporating a Small Business?
Whether you are incorporating a small business from scratch or are purchasing an existing one, it is important that you contact a business for advice. Incorporation laws vary from state-to-state. Additionally, you must follow specific procedures after incorporation to maintain your corporate status. An experienced business lawyer can help you understand your state’s procedures and ensure your business’ compliance.