Revealed: Steps on How to Incorporate Your Business

How Limiting Personal Liability Is Crucial for Your Business

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In recent times, many business owners have found it easier to run their businesses as a corporation or other former structure rather than as a sole proprietorship. Incorporating your company is one of the best ways of making it run as a separate legal entity completely separate from you as an owner. Unfortunately, though, many entrepreneurs have not taken the proper steps necessary to be an incorporated company but before we look into that, it's good that you get informed about the benefits of incorporating your business.

A business that has been incorporated enjoys a wide range of benefits. To begin with, it has unlimited life meaning that it can go on till it accomplishes its mission even if the individual owners are no longer living. Secondly, the owners of the corporation are not held responsible when the business at any time is unable to pay off its debts. In simple terms, it has unlimited liability. Moreover, the transfer of ownership is easy via transfer of securities. Lastly, a corporation, especially the S types, enjoy tax benefits since the income generated passes through the accounts of the individual shareholders.

Steps to Incorporating a Business

Unlike a sole proprietorship that does not involve a lot of procedures, forming a corporation needs you to observe and go through different guidelines as set by the law. Here is a look at the steps that you need to follow so as to fully incorporate your business.

Weigh Whether Your Business Will Benefit From Incorporation

It is good for you to decide on how you will personally benefit from making your business a corporation. You should note that incorporating your business comes with different advantages compared to running it as a sole proprietorship. First of all, your assets will not be used as collateral in case the business runs into bankruptcy.

It would also be easier for you to transform it into a public company. At the same time, it would enable you to offer stock options to employees. You will also be able to transfer ownership of the business to other members for continuity. Thus, if these benefits sound good to you, then incorporation of your business should be the next step.

Appointment of Board Directors

For you to be recognized as a corporation, you as the CEO should appoint a board of directors (BOD). If there are several shareholders in the business, then they are the ones required by law to make these appointments. The names, as well as contact addresses of the directors, should be written and duly signed on the incorporation paperwork. While doing so, it is also good for you to assign each director a role before submitting the papers. In case the board of directors is changed, you have to communicate it to the state by filing a statement of information.

Assembling the Shareholders

In order for the incorporation to be successful, you need the back up of the shareholders. They are the one responsible for electing the board members. This means that they have a great say towards decisions made by the corporation. Thus, whatever you want to do on behalf of the corporation has to involve them through consultation.

Are You Going for an S Corporation or a C Corporation?

If your corporation is sizeable enough, it is good to go for a C type instead of the S type but if you have fewer than 100 shareholders, an S corporation would be appropriate. C corporations are taxed individually and pay taxes at the corporate level. However, if the income of the company is distributed as income, there is a possibility of suffering from double taxation since every shareholder would be taxed. Lastly, C corporations may have both common as well as preferred stock.

On the other hand, the S corporations are for companies with less than 100 shareholders. These type of corporations do not pay tax at the cooperate level but file an informational federal return. Both the profits and losses are reported on the individual tax returns of the business owners.

Also, the losses of the business may be passed to the personal taxes of the owners.

Look for a Corporate Lawyer

The corporation laws are quite complex and need you to have or rather consult with a corporate lawyer before signing on them. Otherwise, you will be vulnerable to making mistakes which could cost you a lot of financial trouble in future. Choose a lawyer who has no stake in your company to avoid unbiased interpretation.

Contact the State Secretary of Your State

Usually, each secretary of state has the mandate to handle all the matters related to incorporation. In case he or she is not in a position to complete or guide you through the other government agencies that may assist you. You will also be directed where to get the relevant forms.

Get the Articles of Association

Each state has different documents that make up the articles of association, therefore, it is important for you to consult your secretary of state for direction. Each document that makes up the article of association has a particular fee attached to them.

Pay the Incorporation Fees

After filling the article of association forms, remember that each document or sometimes some of them has to be paid for. The incorporation fees though vary from state to state. Therefore, there is a need to inquire about what the amount is from the secretary of state.

Filing a Statement of Information Form

This might not be a requirement in all states but for those with this requirement, you have to adhere to it for your business to be incorporated. Generally, filling this form takes place a few months after signing the articles of association. This document contains very basic information about the corporation such as the names and address of the directors, members of the board etc.

Register the Corporation With the United States Internal Revenue Service (IRS)

This is the last step when incorporating a business. You need to register your corporation with the US Internal Revenue Service.