chapter 3

HOW TO INCORPORATE

After you come up with the perfect business name, you'll need to decide if you want to incorporate. Incorporating isn't mandatory, but doing so can provide you and your business greater flexibility, liability protection, and a more professional image. If you're serious about your business, strongly consider incorporating it.

Why Incorporate?

Incorporation can be a benefit to any business, large or small. Each incorporated entity type is different, but they share certain important traits across the board. We'll go into some of the differences below; but for starters, here are a few of the best reasons for incorporating your new business:

  • Tax Benefits: LLC's and corporations allow you to draw a salary, write off business expenses, and avoid taxes on some of your profits.

  • Liability Protection: Incorporated businesses are separate from their owners. That means that if you get sued or your business doesn't succeed, your personal assets generally won't be at risk.

  • Access to Capital: Banks and other lenders see incorporated entities as more legitimate. You'll have an easier time getting cash to grow your business and you can also distribute stocks.

Although it can vary from state to state, Incorporating is a fairly simple process. However, in many states, all that is required is for you to file articles of incorporation with your Secretary of State's office. We can help you incorporate. Just answer a few simple questions, and we'll take care of the rest.

Perhaps the hardest part of incorporating is deciding which entity you'd like to be. Let's take a look at the options:

  • Sole Proprietorship: A sole proprietorship is the default business entity. In fact, sole proprietorships are automatically created simply by doing business. Individual contractors and freelancers are often classified as sole proprietorships.

    It is very important to note that Sole Proprietorships are NOT incorporated entities. That means there's no legal distinction between you and your business. In other words, all business taxes are handled on your personal filings (often called pass-through taxation) and your business provides no personal protection from liability in the event that your company is sued.

  • Limited Liability Company: A limited liability company (or LLC) is perhaps the most popular small business structure. It gives you a lot of the benefits of a corporation without some of the compliance hassles that come along with running an S- or C-corporation.

    Notably, LLC's create a separate legal entity, shielding the owners from business liabilities—as long as the business actually remains a separate entity. LLC's also practice pass-through taxation and can have any number of owners, but cannot issue stock.

    This business type is popular among restaurant owners and landlords, among others.

  • S-Corporation: S-corporations (sometimes called S-Corps) are another popular option for smaller businesses. S-Corps, like all corporations, enjoy limited liability status. They can also issue stock (though are limited to 100 shareholders) and, unlike C-Corps, are not subject to double taxation.

    On the other hand, S-Corps are not as flexible as LLC's and are subject to more regulation. Only private U.S. citizens or legal residents can own an S-corporation.

  • C-Corporation: C-corporations (or C-Corps) include the behemoths of the business world. A C-corporation is the only entity that can issue an unlimited amount of stock and different classes of stock. This unique feature makes this business type near-mandatory for companies that rely heavily on venture capital or numerous investors.

    For many startups and solo-run businesses, however, the C-Corp may be overkill. Unless you need to issue stock, you can gain many benefits of incorporation simply by forming an LLC.

  • Partnerships: Partnerships are about what you'd expect: an agreement between two or more individuals who all contribute and receive benefits from their venture. While there are many different types of partnerships, they all have basically the same principles behind them.

    The drawback of partnerships is that they may dissolve if one partner leaves, or if another joins. Standard partnerships also lack any liability protection unless you form as an LLP—a limited liability partnership—which insulates each partner from being liable or responsible for the actions of another partner.

    Many law firms are common examples of partnerships as they are prohibited from incorporating as an LLC.

estate-planning-tips
STARTING A BUSINESS TIP
"An LLC is the best way to allow you to bring in partners to help fund your new business because of the flexibility of this type of entity."

Changing Entities

If your business outgrows its original entity, or if you simply change your mind, there are options available to transform your business into the newly-desired entity.

If you're currently a sole proprietor, then there's nothing to worry about. Incorporating is often as easy as filing articles of incorporation.

For corporations or companies there's more to consider; however, many states have passed laws that make it significantly easier. The process is called statutory conversion and is completed by filing a single form, typically called a Certificate of Conversion. Completing and filing the certificate is all it takes to change business entities. Easy.

If your state doesn't allow statutory conversions, the process may be similarly completed with a statutory merger. This is a roundabout way to do the same thing—first by creating a new company with the desired business type and then merging the old one into it. There are some more steps to complete with a merger, since it requires creating a new company, rather than recategorizing an existing one, but it's still fairly straightforward. If you have questions about changing your existing business structure, we recommend that you ask a lawyer. If you're curious about your own state's rules, check with your Secretary of State—we've compiled a list state for you here.

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