Setting up a corporation can be an important step in protecting yourself (within reason) from corporate debts and obligations, and liability for corporate actions. Incorporation can be ideal for small businesses because as little as one incorporator (individual) is needed to file an application with the state.
In addition to personal asset protection, there are several other advantages for incorporating a small business, including but not limited to:
- Tax flexibility and incorporation tax benefits: To avoid double taxation in C corporations, business owners can operate under subchapter S of the Internal Revenue Code. An S corporation allows income to pass through to its shareholders.
- Unlimited life and transferability of shares: Unlike proprietorships, the life of the corporation can go on indefinitely, without being dependent on the life of an individual or individuals. Shares may also be transferred or sold to another family member without the costly and tedious process of divesting yourself of ownership, as in proprietorships.
- Enhanced credibility and the ability to raise investment capital: A corporation may be more attractive to new investors, especially because of the ease of share transfer and limited liability.
If you have decided to incorporate your business, it is a good idea to speak with an experienced business attorney. Doing so may not only save you a lot of time, but will ensure that you don’t miss any requirements or important details in your state’s laws. An attorney can also help you decide which type of corporation is best suited for your company (e.g., S Corp, C Corp, or LLC).
To begin the process, contact your secretary of state or the state office responsible for corporation registration. This will give you access to fee schedules, forms, and instructions. You will then need to prepare articles of incorporation and a set of bylaws that detail how the corporation will run. This should include the responsibilities of officers, directors, and shareholders, as well as information on shareholder meetings, and any other pertinent details related to running the company.
When forming a corporation, one major decision involves deciding where to incorporate your business. Most business owners choose the state in which they live and conduct the majority of their business. However, you may choose any state since you are not required to incorporate in the state where your business operates. Your attorney can help you decide what state is best for your bottom line and tax purposes. The most popular states for incorporation include:
It is important to weigh the advantages and disadvantages of incorporation before deciding to proceed. There are a few reasons individuals may be reluctant to incorporate their business, including:
- Corporations are more expensive to set up, as opposed to forming a sole proprietorship or a partnership.
- Owners and directors are required to follow outlined formalities, and the corporation must hold annual meetings.
- Periodic filings with the state are required of corporations, as well as paying annual fees.
Incorporating your business is a big decision not only for your own livelihood, but also for the success of your business. Peace of mind is important, and a corporate lawyer in your area can help streamline the incorporation process and ensure no detail is missed.