Whether you currently run your own business as a sole proprietorship or are planning to launch a business in the near future, the decision to incorporate your business could be a wise one. Specifically, incorporating your business means establishing it as an LLC, C Corporation or S Corporation. Each option comes with its own inherent benefits — and by having a better understanding of the advantages of incorporation as well as the steps necessary to incorporate, you can set your business up for success and growth.
Things to Consider Before Incorporating
While incorporation makes sense for many businesses — especially those that have grown significantly past the stage where operating as a sole proprietorship makes sense — there are still some important considerations to keep in mind as you prepare to incorporate.
Legal Protections
Start by making yourself aware of the specific legal protections you'll enjoy once your business is incorporated. This is one of the most compelling reasons that people choose to incorporate in the first place. When you incorporate your business, your personal assets are more or less safe in the event that your company is ever sued. As a sole proprietorship, this is not the case; you could end up losing everything in such a legal battle.
Costs of Incorporating
Specific costs related to incorporating a business can vary from one state to the next. However, you can generally expect to spend a few hundred dollars on administrative and filing fees when it comes time to incorporate, so you'll want to factor this in as well. Combine this with the administrative burden of filling out and filing all the necessary paperwork, and you'll definitely want to make sure incorporation is the right choice for you before you embark on the process.
Separate Tax Returns
As a sole proprietor, you can currently file your business taxes within your individual tax return. Once you incorporate, however, you will need to completely separate your personal and business taxes, meaning you'll need to fill out a separate return for your company. This will require additional time and expense on your part, so be sure to factor this in when deciding whether or not incorporation is right for you.
Steps to Incorporating a Business
If you decide to incorporate, specific laws and regulations can again vary from state to state. However, there are a few steps you can expect to follow regardless of where you live or plan on incorporating.
Decide on a Business Name
If you already have a business name in mind as a sole proprietor, you're ahead of the game! However, you'll need to check and make sure that your business name hasn't already been filed at your state's corporate filing office. Having a couple of alternate names in mind is never a bad idea, as you may be surprised to find that your business name is already registered in your state.
Once you find a name that is available, you'll want to proceed quickly with the remaining steps.
Follow State Requirements
This is where you'll need to check the requirements your state has in place in regard to incorporating, as the specific steps can vary slightly. Keep in mind that you are under no obligation to incorporate in the state where you live. If you do the majority of your business out of another state, you may want to file in that state. Many business owners, however, do find that incorporating in their home state is easiest (keep in mind that doing business in another state may trigger registration requirements; not to be confused with incorporation).
Also keep in mind that incorporating in another state can complicate things, as you'll need to follow that state's tax laws and file a separate tax return for that state as well.
Decide on a Corporation Type
When incorporating your business, you essentially have three options from which to choose: a limited liability company (LLC), an S corporation and a C corporation. Each has its own unique advantages and disadvantages that you'll want to consider.
LLC – An LLC provides you with protection from any personal liability and requires far less in the way of record keeping than an S or C corporation. Furthermore, this structure allows for easy sharing of profits and responsibilities among members. On the other hand, this option typically isn't recommended for businesses seeking capital investments, and it does subject members to self-employment taxes.
C Corporation – A C Corporation also offers protection against personal liability and is a good option for those looking to raise capital investments, as C Corporations are considered established entities. With this structure, however, you will be subjected to double taxation, and this is also the most expensive type of incorporation to complete.
S Corporation – An S Corporation also protects against personal liability and is unique in that all profits earned through this type of business structure pass directly onto the owners' personal tax returns. However, not all companies will be eligible to file for an S Corporation, so you'll need to make sure you meet some strict requirements. You can read up on those requirements in our other blog post.
Prepare and File Your Paperwork
Once you've completed all the paperwork necessary within your state, you will need to file the paperwork and pay any required administrative and registration fees. You can choose to do this yourself, but typically, working with an attorney or other third-party service that specializes in incorporation is your best bet. If your city or county requires a business license, a professional service can help you obtain one of these as well. When your paperwork is filed, you'll also receive a Tax ID Number (TIN) or Employer ID Number (EIN) that you'll use when filing taxes.
Open a Business Bank Account
Last but not least, make sure to separate your business and personal expenses by opening a business bank account since you'll now need to track and report these separately.
In Summary...
Incorporating can be a great choice for many business owners. Not only does it offer protection for your personal assets, but there may be some tax advantages as well. The key is determining which type of business structure is right for you and following the right steps to become incorporated in your state.
