At its simplest, incorporating a business involves creating Articles of Incorporation (rules for managing a corporation) and filing them with the appropriate state agency. Incorporation becomes "official" when the paperwork is filed with the state and filing fees are paid. Specific laws for becoming incorporated vary from state to state.
Limited liability corporations (LLCs)
Besides the standard corporation, you may want to establish a Limited Liability Corporation (LLC). The benefits and protections of an LLC are similar to those of a standard corporation, but the formation and operation of an LLC is less complicated. An LLC is not burdened by all of the legal matters a standard corporation faces (shareholder meetings, annual reports, etc.); however, a standard corporation can sell stock to raise capital, while an LLC cannot.
Benefits of incorporation
1. Limited liability. A properly established and operated corporation is accountable for its own taxes, debts, and other business obligations, thus protecting the assets of the individuals who comprise the corporation.
2. Lower taxes. Corporations are taxed at a lower rate than individuals, plus they can own shares in other corporations and receive dividends that are up to 80 percent untaxed.
3. Potential for captial. Corporations can also raise capital by selling stock or exchanging services for interests, instead of acquiring loans that would require interest payments.
Other factors of incorporation
Besides the obvious advantages to forming a corporation, there are several factors to consider in the process. For example, you will need to choose where to incorporate. The general rule is to incorporate in the state where the company operates. If your corporation exists in multiple states, you may have to register as a "foreign" corporation in those states. You may want to consult a legal expert to help navigate this path.
A corporation must also have an Employee Identification Number (EIN). An EIN is essentially the corporation's taxpayer identification and is required for all tax and withholding purposes. Please note that separate state and federal EINs may be required.
Though there are many factors that will determine the kind of corporation you establish, there are some basic steps that you will need to take:
- Draft Articles of Incorporation.
- File Articles with the appropriate state agency and pay applicable fees.
- If your corporation is in multiple states, you may need to register as a "foreign" corporation in those other states.
- Make sure your new corporation has an Employer Identification Number (EIN).