Steps to Incorporate a Business
Incorporating a business involves deciding on the specifics of your business like choosing a corporate structure, complying with requirements set by the state for incorporating and paying the necessary filing fees.
Find the specific details of the steps you need to undergo to establish your business as a legal entity.
So you’ve decided to register your business as a corporation rather than a proprietorship or partnership. You think you are better off separating yourself and your assets from the company you will be building. That way you and your personal assets are insulated from potential legal and financial liabilities that your company might have to face in the future, such as creditors wanting to call back on money owed.
Choosing Between a Corporation and an LLC
What else would you need to do? You need to choose whether to incorporate your business as a regular corporation, an S corporation or a limited liability company. C and S incorporations are almost the same except for the way profits are taxed. C corporations are taxed for business profit and for dividends to shareholders and pay directly to the government.
That’s why some businesses opt for an S incorporation. Instead of paying for income taxes for the corporation, owners reflect dividends and losses into their individual tax returns. This allows them to avoid having to be taxed double, and to lower taxes by using losses to offset income from other sources. S corporations, however, are limited to one class of stock, to certain business transactions, and less than 100 shareholders -- which should all be individuals. If you opt for an S incorporation, you would have to file for I.R.S. Form 2553 with the Internal Revenue Service.
If you choose to incorporate as an LLC, you wouldn’t have to worry about the limit of the shareholders you can take in or on what they are because they can be corporations or individuals. But unlike a corporation that can continue indefinitely, an LLC has a fixed duration. Members of an LLC, though, can vote to extend that period upon expiration. For a detailed comparison of business structures, visit The Small Business Administration Web site.
Next, you would have to decide where to incorporate your business. While you can have it registered in any state, you would have to consider the costs involved for doing so. For logistic purposes, the most practical way is to incorporate it where you conduct all or most of your transactions. Besides, registering it in a foreign state would require you to declare your business as such in your home state, which would cost additional expenses. Some businesses -- especially national players -- incorporate in another state to benefit from better tax treatment and more flexible business laws. But unless your scope is this wide, you will save a lot by doing business where your clients are.
Filing Requirements and Fees
Once you’ve decided where to register the business, you have to comply with the state requirements for incorporating. You have to submit an article or certificate of incorporation with the appropriate state office. That certificate would normally contain the name of the company (with the distinctive and/or descriptive and legal elements), names and addresses of incorporators, the type and number of stocks, names of the directors, officers and legal representative, initial capital investment, and corporate bylaws.
Then you’d have to pay the necessary administrative and filing fees, which vary from state to state, but will generally be around $150, excluding possible government filing fees. There is also the first-year franchise tax fee that could cost around $900. To see required state licenses for incorporating a business, visit USA.gov.
To facilitate all of these, you can either hire a lawyer or use an online incorporating service.
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