Do I need to incorporate my small business?
Whether your team is composed of two people or 10, all businesses can benefit from incorporating. Advantages of forming a corporation or limited liability company (LLC) include:
- Personal asset protection. Both corporations and LLCs allow owners to separate and protect their personal assets. In a properly structured and managed company, owners should have limited liability for business debts and obligations.
- Additional credibility. Adding "Inc." or "LLC" after your business name adds instant authority and legitimacy. Consumers, vendors, and partners may prefer to do business with an incorporated company.
- Nationwide availability. All 50 states and the District of Columbia now recognize both corporations and LLCs.
- Name protection. In most states, other businesses may not file your exact corporate or LLC name in the same state.
- Perpetual existence. Corporations and LLCs exist perpetually, even if their ownership or management changes. Sole proprietorships and partnerships end if an owner dies or leaves the business.
- Tax flexibility. Though profit and loss typically pass through an LLC and get reported on the personal income tax returns of owners, an LLC can also elect to be taxed as a corporation. Likewise, a corporation can avoid double taxation of corporate profits and dividends by electing Subchapter S tax status.
- Deductible expenses. Both corporations and LLCs may deduct normal business expenses–such as salaries–before they allocate income to owners.
Importance of incorporating to protect your assets
Corporations and LLCs offer greater asset protection than sole proprietorships and general partnerships, which is a strong reason for incorporating a business. A sole proprietor or general partner has unlimited personal liability for the debts and obligations of the business. In other words, their personal assets (like their home, car, and personal savings) remain at risk in a judgement against the business.
In contrast, corporations and LLCs allow owners to separate and protect their personal assets from the debts and obligations of the business. In a properly formed and structured corporation or LLC, a judgement against the business should not affect an owner's home, car, savings, or other personal assets.
Where to incorporate
Most businesses incorporate or form an LLC in the state in which they primarily operate, for several reasons:
- Choosing your home state is typically the least complicated option
- It usually costs less than incorporating in a different state, but there are exceptions
- You can avoid paying franchise taxes and filing annual reports in more than one state
Many companies conduct business throughout the United States and abroad. A corporation or LLC with business locations in multiple states may incorporate in a single state and then register to do business in additional states. This means, to incorporate your business, you must formally register, file annual reports, and pay annual fees to conduct business in multiple states.
Contact one of our business specialists to better understand how to incorporate your company in your home state or a state that offers the best benefits suited to your type of business.
If you are outside the U.S. and unfamiliar with the various options afforded by several key states, our team of specialists can also help you choose the right state for incorporating your business in the U.S.
Should you incorporate or form an LLC?
Typically, most people incorporate, or form a limited liability company (LLC), to safeguard their home, car, and personal savings. Incorporating helps you conduct business without the apprehension of losing personal possessions due to a business liability.
LLCs are popular with small business owners because they combine the simplicity of a corporation with the tax advantages and flexibility of a partnership. Both businesses and individuals can own an LLC. LLCs draft an internal operating agreement to govern ownerships.
Unlike LLCs, corporations issue shares of stock. The Internal Revenue Service (IRS) taxes most corporations at a lower tax rate than individuals. Corporations use bylaws to set forth the management rules with their shareholders, directors, and officers.
Still unsure of the right structure for your business? Read more about the differences between an LLC and an Inc. to see which makes the most sense for your business.
Incorporating and taxes
When you incorporate a company, tax regulations depend on the type of business you select. Contact your tax professional for more information about the business type you choose. Some regulations include:
- C corporations (C corps) file IRS form 1120 to report corporate income to the Internal Revenue Service. The IRS taxes company profits at corporate tax rates and dividends paid to shareholders at individual tax rates. For this reason, you may hear tax professionals refer to "double taxation" of a C corp.
- Corporations can elect "pass-through" taxation by applying to the IRS for status as a Subchapter S corporation (S corp). The S corp provides the same protection from personal liability. However, owners can report their share of company profit and loss on their individual tax returns. The S corp cannot have more than 100 shareholders.
- Like a sole proprietorship or partnership, an LLC enjoys pass-through taxation. This means that owners (also known as "members") report their share of company profits or losses on their individual tax returns. The IRS does not assess taxes on the company itself. This avoids the "double taxation" that general, or C corps, experience. In a C corp, the IRS taxes profits at the corporate level and dividends at the shareholder level.
How to incorporate a business
To begin incorporating a company, follow these simple steps below:
- Decide to incorporate. Before you set up a corporation, it's important to understand the benefits of incorporating or forming an LLC. Knowing just what incorporating entails for you as a business owner–including financial and administrative expectations that may need to be reported periodically–can help you decide if incorporating is the right move for your company.
- Select incorporate.com. It's simple to form a corporation through incorporate.com. Rather than sift through endless piles of complicated paperwork and confusing terminology, you can rely on our experts, who have helped countless businesses through the process of incorporation. Our thorough understanding of incorporation practices nationwide will make the process of forming a corporation a painless experience. Learn why we think you will benefit from our services.
- Choose a business structure. You may be wondering, "Exactly how do I incorporate my business?" We'll help guide you through the process, including the different business structures–C corps, S corps, and LLCs–and all their different benefits, which may help you choose the best structure for your company's current needs and anything that arises in the future. Check out our Business Comparison Chart for more info.
- Choose a state. Once you've decided to start your own corporation, depending upon your company's needs, you may want to incorporate in a state other than where your business currently functions. Additionally, some states have strict guidelines around unique names for corporations. When registering your corporation, you can rely on our experts to help you name your company following state guidelines. Get more information about choosing a state in which to start a corporation.
- Choose a package. Once you have a firm grasp of the options that various company structures and states provide when forming or setting up a corporation, you're well on your way to carving out a well-planned future for your new business. View our package options and begin incorporating a business online today.
- Place your order. You can incorporate or form an LLC online, or by phone with a business specialist at 855-236-4043.
Next steps after incorporating
Once you submit an order to start a corporation, we take care of the paperwork for you:
- We assign your order to a business specialist, who will contact you if there are any problems with the preliminary name search.
- We complete the Articles of Incorporation (for a corporation) or Articles of Organization (for an LLC) on your behalf. A few states require your signature on the completed documents before submission. Normally, we then submit documents directly to the state.
- We file your documents with the state in which you wish to start a corporation or an LLC.
- We forward the state approval notice to you (generally within 5-10 business days, although turnaround times vary by state).
Business owners should consider a number of next steps after incorporating. For example, many businesses: