From Our Partners at MyCorporation
What does it mean to incorporate a small business, anyway? If you’re new to entrepreneurship, you might not realize the importance and value that incorporation has for the long-term success of a business.
What Is Incorporation?
Incorporation is defined as the process of creating a corporate business structure. This structure allows the business to act as a separate, legal entity from its owner. An incorporated business provides its owner with liability protection. In the event of an unforeseen circumstance, such as a lawsuit, the owner’s personal assets would not be impacted. This is because liability protection creates a separation between personal and professional assets in an incorporated business. An unincorporated business does not have a business structure. As such, the business would not have liability protection.
Now that you know what it means to incorporate a small business, how does one begin the process? Incorporation is often perceived as time-consuming and complicated with a lot of paperwork to fill out and file.
The reality is incorporating a small business is actually quite simple. Here’s a step-by-step guide for how to do so — and what else your business will need after it has incorporated.
1. Choose the appropriate entity formation.
There are several different types of entity formations small businesses may incorporate as. Here’s a quick look at some of the most common types:
- Limited Liability Company (LLC): Incorporating as an LLC is often a popular choice for most small business owners. This entity provides its owners (or members) with liability protection. Forming an LLC also offers flexibility in choosing the way you would like the entity taxed, with options including as an S Corporation or partnership. Remember that if you decide to form an LLC, it is advised that you set up a written operating agreement. This document covers some of the essential rules and regulations for operating as an LLC. Some rules outlined include members’ rights and voting power, the ownership interest of each member, roles and responsibilities of business owners and how to conduct business meetings.
- Corporation: This type of entity is often picked by businesses that have the intention of expanding on a global scale or would like to go public with an IPO. Corporations are much more structured than their LLC counterparts. If you form a corporation, your organization will be required to have a board of directors. You will also need corporate bylaws to help maintain consistency in the corporation’s operations.
- S Corporation: One of the biggest benefits of forming an S Corporation is the ability for a business to legally avoid double taxation. An S Corp chooses to be taxed under the provisions of Chapter 1, Subchapter S of the U.S. Internal Revenue Code. This means that the company does not pay for income taxes. Instead, income taxes, as well as deductions, credits and losses, will “pass through” to the owners. Only the individual shareholders will be responsible for paying taxes. The business will not pay corporate income tax.
- Non-Profit Corporation: Businesses that choose this entity formation are committed to benefiting the general public through charity, environmental and social work goals. Non-profit corporations must file to incorporate their nonprofit, and file for 501(c)(3) tax-exempt status.
2. File to incorporate as a legal entity.
Are you still unsure which entity formation is the best fit for your business? Consider consulting an attorney for advice.
Once you have chosen an entity that fits your specific needs, you may begin filing an application with the Secretary of State in the state you wish to incorporate in and conduct business. Some entrepreneurs choose to do this on their own. Others request the help of a third-party organization, like MyCorporation. We file paperwork on behalf of small business owners and circle back with confirmation that your incorporated business has been approved by its designated Secretary of State.
My Business Is Incorporated! Now What?
Your newly incorporated business still needs to check a few additional items off its legal to-do list. Let’s quickly review what comes next after you have incorporated your business.
3. Obtain a tax ID.
A tax ID is often referred to as an employer identification number (EIN). Obtaining an EIN is valuable to a small business for several reasons. This nine-digit number issued from the IRS helps to uniquely identify tax accounts. You may use it to open a business bank account, hire employees and establish a pension, profit sharing, or retirement plan.
4. File to register trademarks.
Trademarks, like names and logos, are unique marks that differentiate your brand to the world. Protect them from being plagiarized by competing businesses early on with federal trademark registration. Conduct a name search first to ensure that your mark is available. If the mark is free, file a trademark application for exclusive rights to the trademark.
5. Apply for business licenses.
The types of business licenses, and permits, your business will need vary depending on your entity type, industry and even the state of formation. Check with your local Secretary of State for the full list of licenses that your business needs to ensure you are applying for the proper materials.
6. File annual maintenance documents.
Annual maintenance documents may be filed depending on your entity formation. For example, if you form an LLC you will need to file an annual report with the Secretary of State. This document updates the state on any changes to your business and its activities over the course of the year. Make sure you file the proper documents, and pay any necessary fees, on time each year to keep your newly incorporated small business in compliance.
Deborah Sweeney is the CEO of MyCorporation.com. MyCorporation is a leader in online legal filing services for entrepreneurs and businesses, providing start-up bundles that include corporation and LLC formation, registered agent, DBA and trademark & copyright filing services. MyCorporation does all the work, making the business formation and maintenance quick and painless, so business owners can focus on what they do best. Follow her on Twitter @deborahsweeney and @mycorporation.
Content does not constitute legal advice from Web.com Group or any of its affiliated entities.