Starting your own corporation can be more costly and time-consuming than other business types, but it will ensure that you're not personally liable for any legal problems associated with the business.
The decision to incorporate is an important one. Work with your business advisor, lawyer, and accountant to determine whether it's right for you and your business. They can also help guide you through the process.
The seven basic steps to incorporation are as follows:
- Choose a corporate name and address: Perform a corporate name search to ensure the name is unique so you don't have trademark problems in the future.
- Select a state to incorporate in: You don't have to incorporate in your home state. There are a number of factors to consider when choosing the location, including the cost to incorporate, tax rates, and corporate laws.
- Select a corporation type: Determine the best type of corporation for your business: limited liability company (LLC), S corporation or C corporation. Research the advantages of each and consult with your advisors before making a choice.
- Determine company directors: Corporations must have a board of directors. The director positions will have to be filed within the Articles of Incorporation and by-laws.
- Choose your share type: Corporations can issue common and preferred stock. Select the best for your situation.
- Obtain your certificate of incorporation: You can get this at the corporate filing office for the state in which you incorporate.
- Process and file the incorporation: You can complete the incorporation by a lawyer or a third-party service. No matter which option you choose, you'll need to file your incorporation with a registered agent.
The Benefits of Starting a Corporation or LLC
Many small businesses in the U.S. are set up as sole proprietorships, but that classification can leave the owner personally liable for any legal problems associated with the business.
If you're thinking of starting your own business or if you've already opened a business as a sole proprietorship—or as a general partnership with more than one owner—you might want to consider making it a corporation or limited liability company (LLC) instead.
Debt is often be the responsibility of the corporation. However, during financing, more and more banks require business owners to sign a personal guarantee, which means their personal assets would be collectible on a defaulted loan.
When you establish a business as a corporation or LLC, you may see benefits in the following areas:
- Liability: A corporation exists as a separate legal entity from your personal life. Any debts or lawsuits are incurred by the company, not the owner. Any business with potential for lawsuits should consult with a lawyer and consider incorporation. Incorporating will offer an added layer of protection, but it is still advisable to obtain business liability insurance.
- Taxation: Another main benefit to incorporating is the taxation of a company. Corporations are often taxed at a lower rate and have better taxable benefits. Talk to your accountant about the tax advantages.
- Raising Money: Financing a small business as a sole proprietorship or partnership can be difficult. A corporation can sell shares of the company and raise money easier than other business structure types.
- Selling the Business: A non-corporate business is hard to valuate properly. A business corporation value will be based on the business, not the owner, therefore making it easy to sell the company.