How to incorporate a small business in 9 steps
- Forming a corporation is more complex than other business entities, but it offers benefits like limited liability, unlimited lifespan of the company, and flexible income disbursement
- You can choose between three different types of corporations—S corporation, C corporation, or nonprofit
- Articles of incorporation, corporate bylaws, and an Employer Identification Number are among the required legal documents to legally operate a corporation
Incorporating your business can take your company to the next level and earn the trust of investors, lenders, vendors, and customers. You could be new to entrepreneurship or may already be a small business owner interested in upgrading your company to a corporation. Either way, you need to know how to incorporate a small business and if it makes sense for you.
Starting a corporation can seem intimidating, but it’s not as daunting as you may think. Learn how to incorporate a small business with this step-by-step guide that takes you from choosing a business name to signing on the dotted line to incorporate your business.
What does it mean to incorporate your small business?
When you start a corporation, you’re creating a business that is its own legal entity. Put simply, it turns your small business into a corporation that’s independent from its owners.
Incorporating your small business officially separates business assets, liabilities, and income from your personal assets. It protects you from any legal action or liabilities your business may incur.
Incorporating also gives you advantages like lower corporate tax rates, the ability to sell stock, and easy transfer of ownership.
If you want to incorporate your business, you’ll need to fill out business formation documents, register with your state, and follow a few more steps which we’ll cover in detail below.
Should you incorporate your small business?
Before choosing to incorporate your small business, you should decide if a corporation is the right fit for you. Corporations bring a wealth of advantages for businesses, but they also come with some drawbacks.
Advantages of corporations
Incorporated businesses give you access to valuable benefits like limited liability, unlimited company lifespan, and flexible income options.
Corporations protect owners and shareholders with limited liability. As such, the personal assets of owners and shareholders are separate from corporate finances and protected in the event of financial trouble or business debts. It also protects from legal action if the company is ever sued.
Corporations also have an unlimited lifespan. The company is not tied to one owner or shareholder and will live on if any one person were to leave the company.
Additionally, owners and shareholders can choose how they are paid by the corporation. You can decide how and when you receive income. You can also decide to be paid in dividends, which will help lower your personal income tax obligations.
Disadvantages of corporations
There are some drawbacks to incorporating your small business. Among these are startup costs, double taxation, and lengthy paperwork.
Starting a corporation is slightly more complex and can cost more than other business entities like a sole proprietorship or general partnership. Among the fees you’ll pay are setup costs, legal expenses, accounting expenses, and annual fees. You’re also subject to double taxation if you form a C corporation. This means your earnings are taxed once on the business level and again on your personal tax return.
Completing the initial paperwork for a corporation can be quite time-consuming and challenging. You must also stay on top of ongoing paperwork like meeting minutes and financial transactions in order to properly fill out your income taxes. This could bring along more costs associated with an accountant that will likely be needed when filing taxes.
How to incorporate a small business
There are many factors to consider when incorporating your small business. It can be a bit complex, but you can get through the process when it’s broken down into the following digestible steps.
1. Check the availability of your business name
When learning how to incorporate a small business, one of the first tasks is coming up with a business name—if you don’t have one already—and making sure it’s available for use.
If you’re starting a new business, you’ll need to choose a unique business name. Your business name should be memorable and explain the nature of your business.Come up with a name that’s intuitive and resonates with your target audience. For example, if you’re starting a landscaping corporation, you can choose something like “Clean Cuts Landscaping” or “Precision Lawn Care.”
If you are a current business owner and already have a name, you can simply double-check that it’s available for use in your local area. This includes verifying that it doesn’t infringe on other companies’ trademarks.
Visit your state’s filing office website to check name availability. You can also look at state and federal trademark registrars to ensure no other company owns the rights to your business name.
It’s a good idea for new business owners to have more than one name in mind in case there are any conflicts. In some states, you can even reserve your business name for 60 to 120 days if you want to hold your name while you organize and plan your business launch.
2. Choose a location to register your business
Once you’ve confirmed the availability of your business name, you’ll need to choose the location of your company headquarters. The easiest option would be the state where you live and do most of your business.
However, your headquarters can technically be located anywhere, so you can consider other states to incorporate your business. Perhaps you want to incorporate in another state for tax purposes, more attractive corporate laws, or a lower cost of incorporating.
3. Determine your business structure
Now it’s time to decide which type of business you’d like to form. There are three different types of corporations: C corporations, S corporations, and nonprofits. Limited liability companies (LLCs) are similar in nature, although they aren’t technically a corporation. Each business structure has its own benefits and drawbacks to consider.
A majority of large corporations are C corporations. C corps are legal entities that are distinct from the company’s shareholders. C corps can open bank accounts, be involved in legal action, establish credit, and purchase property. They are also taxed separately from shareholders.
S corps are very similar to C corps except for two details—the number of shareholders and taxation. S corps can only have 100 shareholders. They also offer pass-through taxation, which means shareholders will only be taxed once on their personal tax returns rather than on both tax returns (i.e., their personal and business tax returns).
Limited liability company
A limited liability company isn’t technically a corporation, however, many small businesses opt to use this business structure. Like S corps, LLCs allow for pass-through taxation. They also give personal liability protection to owners, which protects your personal assets in the event of financial hardship or legal action from third parties. When you form an LLC, you’ll need to file articles of organization rather than articles of incorporation.
A nonprofit acts as a corporation, but it’s unable to make a profit. All profits are reinvested into the corporation for non-business goals. Typical nonprofits include charities and foundations that aren’t seeking to make a profit.
4. Select company directors
All corporations must appoint a board of directors. The board of directors is in charge of running the corporation and making any decisions to advance the company. Your board of directors should have expertise related to your business, excellent leadership and management qualities, and act in the best interest of the business.
Carefully consider who you appoint to your board of directors since they’ll be responsible for ensuring the success of your company.
5. Delegate a registered agent
A registered agent can accept mail on your corporation’s behalf. In fact, you must have a registered agent to receive official mail communications from your state.
You can choose a third party from outside your company to be your registered agent. This can be a person, company, or business attorney. If you opt to use a business attorney, their office must reside in the same state where you incorporate.
You can also delegate the owner of the business, officer, or any other employee to serve as your registered agent. Whoever you choose, they must live in the state of incorporation.
6. Write and submit articles of incorporation
The articles of incorporation are the official documentation you’ll submit to your state to incorporate your business. It includes your business name, the purpose of your business, location, and company board members.
You can obtain a blank document for your articles of incorporation from your state’s corporate filing office or online at your state’s government website. For example, here are the corporate filing forms for the state of Michigan. You can also obtain a template from a local law office.
You can write the articles of incorporation yourself or choose to elect an attorney or another third-party to handle this duty. It depends on what you’re comfortable with and what your budget is.
Once you’ve drafted your articles of incorporation, you’ll need to file them with your state and pay a filing fee. Filing fees vary from state to state, but they’re typically between $100 to $150. Remember to save copies of your articles of incorporation for legal purposes.
7. Meet additional federal and state requirements
Along with registering your business, you’ll also need to meet a few more federal and state requirements to legally operate your business. These include filing an Employer Identification Number (EIN) and opening a business bank account.
An EIN—also known as a Federal Employer Identification Number—is a unique nine-digit number used by the Internal Revenue Service (IRS) to identify companies for tax purposes. You can apply for your EIN on the IRS website.
You should also open a business bank account to ensure your personal assets are separate from the business. Doing so will protect your personal assets in the event of financial troubles or legal action against your company.
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8. Create bylaws and a record book
Corporate bylaws are rules and regulations that dictate how your company will function and be governed. Corporate bylaws aren’t a requirement in most states, but they help your corporation run smoothly and govern how the business will operate.
Your corporate bylaws should include the following:
- Meeting rules for shareholders and directors
- Types of shares and how many shares of stocks are issued
- How the company will handle transactions like loans, venture capital, and contracts
- Financial audit procedures
- How articles of incorporation and bylaws are amended
The corporate records book is a compilation of all legal documents pertaining to your business. An official record book proves that you’re following state laws and are in compliance with all IRS requirements. These documents can include the following:
- Articles of incorporation
- Corporate bylaws
- Stock transactions
- Annual reports
- Recorded minutes from all corporate meetings
- Loan documents
- Contracts with third parties
- Documents from real estate transactions
You don’t need an actual physical copy of your record book. It’s acceptable to safely store it in a digital format.
9. Schedule your first board meeting
The last step to officially incorporating your small business is holding your first board meeting. This will help all board members, employees, and shareholders get on the same page to understand the inner workings and goals of your corporation.
At your first official board meeting, you can go over your articles of incorporation and announce your corporate bylaws. You can also officially elect your officers, issue stocks to shareholders, and set a schedule for future board meetings.
Remember to record what was discussed and take meeting minutes to add to your corporate record book. Most states require corporations to hold at least one board meeting per year.
Decide if a corporation is the right fit for your business
Now that you understand how to incorporate a small business, you can decide if it’s the right choice for you. Corporations give you access to excellent benefits like liability protection, unlimited lifespan, and a boosted reputation with investors and consumers. But you should also consider the associated costs and whether you’re willing to complete the initial paperwork and ongoing record keeping.
Once you’ve decided that a corporation is the right choice for your company, you can move on to building your business with some of these helpful growth strategies.
The information above is provided for educational and informational purposes only. It is not intended to be a substitute for professional advice and may not be suitable for your circumstances. Unless stated otherwise, references to third-party links, services, or products do not constitute endorsement by Yelp.