How to incorporate a business

When you are starting your company, you may have many questions in reference to incorporate a business. It is in general advisable to consult with your attorney and CPA to find out which is the best form to incorporate for you.

Incorporating basically means that you will make your company an independent legal entity, by registering your business with the division of corporation for your specific state. The registration includes the name of the business, the proposed business activities, as well as the names of all officers the corporation will have.

You can chose from multiple ways how to structure your company, all of them will have slightly different tax implications and liabilities.

In order to understand how to incorporate a business, following a summary of the the most recognized forms to operate your business.

Sole Proprietorship

As the name describes it, you are operating your business on your own. You do not have to register with the state, but need to watch out for certain forms you will have to file with the Internal Revenue Service.

The business is operated under your personal name, not under a separate company name. For your tax related responsibilities you need to use your SSN.  If you chose this form, make sure you separate your business income and expenses. Keep good record, it will help you and your CPA to file your taxes properly and allow to deduct business expenses.

Partnerships

A Partnership is an arrangement between two or more parties, which equally invest and share gains and losses.

The partnership has to be registered under a separate name with the division of corporation. If you incorporate a business as a partnership, the company wont pay taxes, but rather pass the tax responsibility through to the partners. This can be done in the form of dividends, each partner is responsibility to file their own taxes.

C-Corporation

Incorporate a business by forming a C-Corporation. This will allow potential shareholders to receive the companies stock in exchange for capital or property.

The separate business name is registered with the state including all required information. The corporation itself is allowed to take certain federal tax deductions. Both the corporation and the individual tax payer are required to file taxes separately.

The C-Corporation is taxed on its profits and the individual business owners on their dividends. In reality, this leads to a double taxation.

S-Corporation

Many smaller corporations chose to incorporate a business as a S-Corporation, this has similar benefits to a Limited Liability Corporation, but is not taxed individually.

The S-Corporation is required to report income, but passes the profits through, in form of dividends to the shareholders. There are certain conditions you need to fulfill in order to be able to qualify as a S-Corporation. A separate form needs to be filed with the IRS after you incorporated with the state.

Limited Liability Corporation

This is a form to incorporate a business which is regulated by state statutes and might differ from state to state.

The owners or owner of the LLC are called members. Each may own a certain percentage of the company, rather than shares. A person, company or foreign entity can be a member of a LLC.

Depending on the amount of members the IRS can determine if you are taxed as a person, corporation or partnership.

One of the main advantages of creating a LLC is that the company itself is treated as a legal entity and the members only have limited liability, depending on their active position in the company.

The typical operating agreement to be executed regulates all particular details.

To incorporate a business, contact your states division of incorporation, it will be slightly different in each state and can be done in multiple ways.

Attorneys, CPA’s, Business Consultants and incorporating services can assist you to create your entity. Depending on your specific needs, this may cost you between $750 to $2500 USD. The draft of an operating agreement is an additional cost and can be significantly higher.

First Step – Chose a name for your business and the form of incorporation. Once you have decided, your consultant can check on the availability of the name and start preparing the specific documents.

Second Step – Your companies name, including the name(s) of the owner(s), officer(s), the registered agent and the initially issued shares, will be registered with the state.

Third Step – After you incorporate a business with the state, you now need to register your new entity with the IRS. You have to apply for your TIN (Tax Identification Number) and if chosen to be a S-Corporation, file an additional form.

Fourth Step – You may order your book of incorporation along with your articles, stock certificates, minutes of meetings and corporate seal. Make sure that you keep all information up to date and obey to the required meetings of the corporation.

One additional remark is important to know, the filling of your annual report. You are required to renew your business status each year by the end of April and submit all applicable changes and fees.

To incorporate a business simply follow this guide, it is probably much easier than you initially imagined.