How to Incorporate a Business
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Before you can run a corporation, the business needs to be incorporated at the state level. The incorporation process includes filing documents and following compliance guidelines, which is more labor intensive than the process when forming other entities. A sole proprietorship, for instance, doesn’t require any paperwork.
But there are many benefits to starting a corporation. A corporate structure provides the strongest liability protections for business owners, and it’s easier to raise capital from outside investors. You could also sell the corporation or go public in the future. If you’re considering starting a corporation, we’ll walk you through the steps of how to incorporate a business.
- What is incorporation?
- How to incorporate a business in 7 steps
- Staying on track with your newly formed corporation
- The bottom line
What is incorporation?
Incorporation is the act of forming a legal corporate entity. Incorporating a business could require you to register with federal, state and local agencies, depending on your industry, and file documents like articles of incorporation.
If you already operate a business as a different entity, like an LLC, partnership or sole proprietorship, you could convert the company to a corporation by following the same steps a new business would follow when incorporating. However, changing from an LLC to a corporation could result in additional taxes, depending on your existing assets and liabilities.
When incorporating your business, you could choose from several types of corporations, depending on your goals for the company. Each type of corporation calls for the same initial incorporation process, but the details about each entity differ.
A C corporation, or C-corp, is an individual entity independent of the business owners. An unlimited number of shareholders can own a C-corp. Owners have limited liability and are not personally responsible for the company’s debts.
C-corps must pay corporate income taxes, which are capped at 21% under the new tax law. C-corps are subject to double taxation since owners also have to pay taxes on dividends on their personal returns.
An S corporation, or S-corp, is considered a pass-through entity. Rather than being taxed at the federal corporate tax rate, income is passed through to shareholders and taxed as individual income. The new tax law allows pass-through businesses to deduct up to 20% of qualified business income.
A benefit corporation, or a B-corp, is a mission-driven for-profit corporation. B-corps must pay corporate taxes and may be required to submit annual reports showing community contributions. Besides having ownership of the company, B-corp shareholders are responsible for making sure the corporation remains profitable and contributes to the public good.
How to incorporate a business in 7 steps
Corporations are subject to more rules and regulations than simpler business entities like sole proprietorships. When establishing a new corporation, follow these steps to get started on the right track.
1. Research your business name
Before settling on a name for your corporation, be sure to check the official trademark database within the U.S. Patent and Trademark Office to avoid a costly trademark infringement lawsuit.
You could also trademark your own business name to prevent other businesses in your industry from using it. You could obtain trademark protection for the name of your products or services as well.
2. Find out where you need to register the business
Most corporations need to register with state agencies wherever they conduct business. You would need to register in any state where your business has a physical presence, where your employees work, where you often have in-person meetings with clients or where a significant portion of your revenue originates. You may be required to register with the secretary of state’s office, a local business bureau or business agency.
You may also need to file for licenses and permits from your city or county office, depending on your type of business. Local governments determine registration, licensing and permitting requirements.
3. Choose a location to incorporate
If your business operates in just one state, you would need to incorporate in that state alone. But if you operate in multiple states, you could choose to incorporate in whichever state is friendliest to corporations. Consider factors like the state’s business tax climate when choosing where to incorporate.
Every state levies property tax and employment insurance tax, but some states exclude other taxes that impact businesses, such as corporate income tax, sales tax and personal income tax. For example, Wyoming, Nevada and South Dakota do not have corporate or personal income tax, while Alaska does not impose individual income tax or state sales tax. If you have the freedom to choose where to incorporate, keep state taxes in mind.
The state’s legal climate should also be considered when making your selection. For instance, Delaware has long been known to have corporation-friendly business laws, and corporate cases could be handled more efficiently in Delaware than in other states.
4. Name a registered agent
A registered agent is the person designated to represent your corporation. A registered agent would sign your incorporation documents and accept service of process if the business gets sued. A service of process would be a hand-delivered court summons notifying you of a lawsuit against your company.
You could act as the registered agent, or you could appoint someone else within the company or a third party. Naming a registered agent would allow you to protect your privacy as the business owner.
5. File your articles of incorporation
The articles of incorporation are a single document that calls for general information about your business, such as:
- The name of your corporation
- Business address
- Business purpose
- Registered agent
- Number of shares that the corporation will issue
You would submit your articles of incorporation to your state’s secretary of state office in person or by email, mail or fax. The fee for filing articles of incorporation is typically around $100.
6. Write your corporate bylaws
Bylaws are the governing documents for your corporation. Though they are for internal use only, you still need to have bylaws in place to keep your corporation running smoothly. You could search for free templates online or hire a business attorney to help you draft your bylaws.
7. Establish a board of directors
All states require corporations to set up a board of directors. Shareholders would elect board members, and the board would need to meet at least once a year. Corporate minutes would need to be taken during board meetings to document the events that transpired and the topics discussed.
Staying on track with your newly formed corporation
Adhering to your state’s requirements is critical to remaining compliant as a corporation. For instance, if the business gets sued and there’s no evidence that you’ve followed regulations, a court could decide the corporate structure is invalid and hold you personally liable for the company’s debts.
After incorporating your business, be sure to keep up with ongoing obligations, such as:
File an annual report
After the business is incorporated, you would need to distribute an annual report to shareholders. The report would include a statement from the CEO, financial data, results of operations, market segment information, plans for new products, and research and development on new company activities, among other things. The annual report is intended to provide shareholders with an overview of the company’s current state.
The IRS may require your corporation to pay estimated or annual income taxes throughout the year, as well as employment taxes and excise taxes. More than 40 states also levy corporate income taxes, which should be a factor when deciding where to incorporate the business.
The bottom line
Incorporating a business may seem like a daunting process since there are many steps to take. But it may be worth it to go the extra mile in setting up a corporation.
The corporate structure protects your liability as a business owner, preventing your personal assets from being at risk. Establishing the business as a corporation would also allow you to raise money from outside investors and eventually take the company public.
Corporations face strict scrutiny, and it’s imperative that you follow all guidelines and regulations to maintain the validity of the corporation. Consider hiring a business lawyer or advisor to ensure you don’t overlook any details when incorporating your business.