Why Should You Incorporate Your Business?

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 What Does it Mean to Incorporate a Business?

To incorporate a business means using a legal process to form a company or corporate entity. A corporation is a legal entity that separates the business’ income and assets from the owners and investors of the business.

A corporation can be formed in almost every country in the world. Corporations are typically identified by using terms such as “Inc.” or “Limited (Ltd.)” in the names of the companies.

What Kinds of Businesses Should Incorporate?

Setting up a corporation can be an important step to protect the owner, within reason, from being liable for corporate debts and obligations as well as being liable for corporate actions. Incorporation may be an ideal step for a small business because only one incorporator, or individual, is required to file an application with the state.

In addition to protecting the business owner’s personal assets, there are numerous other advantages to incorporating a small business. These advantages may include, but are not limited to:

  • Tax flexibility and incorporation tax benefits;
  • Unlimited life and transferability of shares; and
  • Enhanced credibility for the business; and
  • The ability to raise investment capital.

To avoid double taxation in a C corporation, a business owner may operate under subchapter S of the Internal Revenue Code. S corporations allow income from the business to pass through to the shareholders.

Unlike a proprietorship, the life of an incorporated business can go on indefinitely. It is not dependent upon the life of an owner or other individual. In addition, shares may be transferred or sold to other family members without the costly and tedious process of divesting ownership, as is required in a proprietorship.

Incorporated businesses may also be more attractive to new investors. This is because of the ease of share transfer and the limited liability.

Why is it Important to Consider Where to Incorporate My Business?

It is very important to consider what state to incorporate in because it may have a dramatic effect on the business’s future operations. For example, if a company plans to have its headquarters in one state but will be doing more business in a different state, an individual will need to consider this carefully when selecting the jurisdiction of incorporation.

If a business is incorporated in one state but conducts its business in a different state, it is known as a foreign corporation in the second state. A foreign corporation may be associated with different filing fees and license requirements.

What are Some Factors to Consider When Researching What State to Incorporate in?

When an individual is considering where to incorporate their business, they should review numerous factors and make comparisons regarding the different states they are considering, including:

  • Taxes;
  • Fees and costs;
  • Insolvency laws; and
  • Ease of operation.

Taxes are an important factor in incorporating a business. It is important to consider the tax rates in the area.

Reviewing the filing fees for corporations in different states is also important. If a business is conducting business in multiple states, there may be costs associated with interstate commerce.

States may have different insolvency laws. If a business becomes insolvent, creditors may be treated differently depending on the state in which the business is incorporated.

In many cases, it is easier to incorporate in the business owners’ home state instead of a state where they do not reside. In some instances, however, it may be more cost-efficient to incorporate it in a different state.

Because of the many details involved in incorporation, an individual should carefully review the previously discussed factors in detail when determining where to incorporate them. Certain states, such as Delaware and Nevada, may offer different benefits for an incorporated business compared to other states.

What are Organizational Costs?

When an individual incorporates a business, they will incur costs, which may include:

Costs considered organizational costs can be amortized over no less than 60 months, which begins in the month when the corporation begins operations. Organizational costs include expenditures such as:

  • Incident to the creation of a corporation,
  • Chargeable to capital account, and
  • Of a type that would be amortizable over that period if expended to create a corporation with a limited life.

Some other examples of organizational costs may include:

  • Legal services which were required for the creation of the corporation, including:
    • drafting of:
      • charters;
      • bylaws; and
      • minutes of meetings;
  • Accounting services;
  • Fees paid for organizational meetings and temporary directors; and
  • Registration fees paid to the state of incorporation.

What are the Steps to Incorporate a Business?

Once an individual has decided to incorporate their business, it is a good idea to seek the counsel of an experienced business attorney. This step may save the individual a lot of time and ensure that they do not skip any of the requirements in their state or miss any other important details in their state laws. A lawyer can also help the individual determine which type of corporation suits their business needs, such as S corporations, C corporations, or LLCs.

To begin the incorporation process, an individual should contact their secretary of state or the state office responsible for corporation registration. This office will provide access to instructions, forms, and fee schedules.

An individual will be required to prepare articles of incorporation and a set of bylaws that detail how the corporation will be run. These documents should include the following:

  • The responsibilities of:
    • Officers;
    • Directors; and
    • Shareholders;
  • Information regarding shareholder meetings; and
  • Any other pertinent details related to running the business.

When an individual is forming a corporation, a major decision they must make involves deciding where to incorporate their business. In most cases, business owners choose the state where they live and conduct most of their business.

However, an individual may choose any state to incorporate because it is not a requirement to incorporate in the state where the business operates. An attorney can assist with the decision of what state is best for the business’s bottom line and what state is best for tax purposes.

There are several popular states for incorporation, including:

  • Delaware;
  • California;
  • Nevada;
  • Maryland;
  • Pennsylvania; and
  • Connecticut.

Are There Any Reasons to Not Incorporate My Business?

Considering the advantages and disadvantages of incorporating a business is important before deciding to proceed. There are numerous reasons why an individual may be reluctant to incorporate their business, which may include the following:

  • Corporations cost more expensive to set up, in contrast to forming a sole proprietorship or a partnership;
  • Owners and directors being required to follow outlined formalities;
  • The corporation being required to hold annual meetings;
  • The corporation being required to file periodic filings with the state, which are required of corporations; and
  • The corporation being required to pay annual fees.

Can a Lawyer Help Me Incorporate My Business?

Yes, a corporate lawyer can be extremely helpful when incorporating your business. Deciding to incorporate your business is a major decision, not only for your own livelihood but for your business’s success.

Peace of mind is important when incorporating your business. Having the help of your lawyer can help streamline the process of incorporating your business and ensure you do not miss any requirements and that you have chosen the best business structure for your needs.

If possible, it is a good idea to meet with a lawyer before beginning the incorporation process because there are many options for types of corporations. Your attorney can assist you with filing any necessary paperwork and will be available if any issues arise after the incorporation process.

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