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So, that business you started in your garage is actually starting to make you a little cash. As your business grows, you may start thinking about making it into a corporation. This page will explain the pros and cons of incorporating and give you the resources on how to incorporate a business.
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Introduction
- Whether you've started making some cash on that home business you started as a side project or you're considering starting a new business, it might be time to think about incorporating. This way you can rest assured that your business will not pose any risk to your personal financial situation, even if the unthinkable happens. The specifics of incorporating are complex and a bit tricky, but the process of incorporating isn't anything to be afraid of.
Why Incorporate?
- Although there are many benefits to incorporating, it generally boils down to one primary reason: eliminating your personal financial liability for your business.
- When you incorporate, you are turning your business into a separate legal entity from yourself, effectively separating the risk involved with starting your own business from the rest of your personal life. After you incorporate, if there is a lawsuit filed against your business for more than it's worth, your personal assets (such as your house) will not be at risk. If you have not incorporated, you could stand to lose everything you have—not an appealing prospect.
- Some other benefits of incorporating include:
- Indefinite lifespan (your business can continue beyond your lifetime).
- Possible tax benefits (like tax deductions for unlimited capital losses and income shifting).
- A separate credit rating for your business.
- Some disadvantages include:
- The costs of filing and possibly hiring a lawyer or accountant (especially around tax time).
- Potentially higher taxes (if your dividends are taxed twice).
- The giant pile of paperwork that is often involved.
- If you're not sure if you should incorporate, contact a lawyer and/or accountant.
How to Incorporate
- If you have done the research and decided that incorporation is the way to go for your business, here is how you can do it.
- Before you actually incorporate, you're going to need to settle on a name for your business. After you pick one, you should check out the U.S. Trademark Office to make sure it hasn't already been taken.
- Next, you'll need to choose which state you'll file in. Generally, you'll pick the state you primarily do business in, although if you operate in multiple states, you may have other options.
- Different states have different rules and guidelines for incorporating. Delaware is often cited as one of the most corporation-friendly states, as it requires no fee to incorporate.
- Go to USA.gov to find all the information you need on incorporation licenses by state.
- Get your money ready. In addition to filing fees, there are other payments you'll need to make to incorporate.
- You will need to specify how many shares your business will be split into. This will partially be determined by how many people run the business and what kind of corporation it will become.
- An S-Corporation doesn't pay income tax, but rather the profits/losses are passed on to the shareholders to file in their tax returns. However, there are restrictions to the number and location of the shareholders (no foreign shareholders).
- A C-Corporation does file income tax, but there are no restrictions to how many shareholders there are or where they are located. This is what most businesses in the U.S. are.
- An LLC (limited liability company) is usually suited to smaller companies with only a few owners. They must either be "member managed" (run by the owners) or "manager managed."
- Now you're ready incorporate!
- If you have the knowhow, you can file the paperwork yourself. This won't add any extra fees, but any time you are dealing with complex legal issues, a mistake could be costly down the line.
- Incorporation service companies (like the ones listed below) will do the paperwork correctly for a fee, but they don't usually provide extra advice on how to structure your business.
- Lawyers might be the most expensive option, but they can help you make the most out of your corporation. If you're not totally comfortable incorporating, consult an attorney beforehand and read up on some of the resources below.
Resources for How to Incorporate a Business
- USA.gov: Incorporate Your Business
- Small Business Administration: Legal Concerns | Forms of Ownership | Basic Structures
- American Institute of Certified Public Accountants
- AHBBO: Incorporating You
- Wikipedia: Incorporation | Share | S-Corporation | C-Corporation | LLC
- Inc.com: How to Incorporate a Small Business (1999)
- About.com: Protect Your Business Losses by Incorporating
- AllBusiness.com: How Much Does it Cost to Incorporate?
- The Washington Post: "How Do I... Choose a Business Structure" (November 15, 2007)
- NOLO Press: Corporations vs. LLCs
- Microsoft Small Business Center: Should You Incorporate Your Small Business?
- Learnthat.com: How Do I Incorporate My Business? (November 19, 2004)
- wikiHow: How to Incorporate Your New Business
- eHow: How to Incorporate a Business
- 101incorporate.com: Forming a Corporation - Questions and Answers
- Entrepreneur.com: Naming Your Business
- USPTO.gov: United States Patent and Trademark Office
- MoreBusiness.com: Incorporating
- WebProNews: Tax Benefits of Incorporating (May 5, 2004)
- MyNewCompany.com: Which State to Incorporate or Form an LLC?
- State of Delaware: Division of Corporations
