5 Important Things To Know Before Incorporating a Business

by Mehdi BAH

Any corporation legally exists as a separate entity, remaining apart from the people who create and run it. This line of demarcation protects its owners or shareholders from liability for the company’s obligations and debts. Although the choice to operate as a corporation does pose certain drawbacks, the benefits will usually outweigh them and offer protections that business owners need to operate safely.

1. Benefits of Incorporating a Business

  • Attract investors.
  • Enjoy tax benefits.
  • Absolve shareholders of personal accountability for the company’s actions.
  • Facilitate changing ownership interests through readily transferable shares. 

Endow the company with an infinite existence beyond the natural lifespan of any one individual owner. Running as a corporation will require you to hold annual shareholder meetings, pay particular fees and make periodic filings with the state. Nevertheless, the benefits of incorporating continue to outweigh the potential issues. Here are some tips to help you incorporate your business.

2. Choose The Right Entity For Your Business

Any business that wants to incorporate must choose a business type that suits its circumstances. There are three major varieties from which to select. These are:

The C corporation.

This is a standard default legal structure consisting of shareholders, officers and a board of directors. Although a C corporation does shield its shareholders from responsibility for the company’s liabilities and tax burdens, its owners must still pay personal income tax on any distributed dividends.

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The S Corporation Entity:

This type of entity pays no corporate tax. By opting to incorporate in S status, the company’s owners ensure that the tax responsibility of the business’s profits, losses and additional tax burdens pass directly to the owners. It is often suitable for companies whose employees number fewer than 35, and it is possible to change to a C corporation if the company expands.

The Limited Liability Company, or LLC:

Under this structure, the business entity itself is not taxed. All profits and losses pass instead to each of the corporation’s individual members and appear on Schedule C of their personal tax returns. While an LLC can request S-Corp status for taxation purposes, it will remain an LLC from a legal standpoint.

Despite their differences, all three sorts of corporate structure relieve owners and shareholders of personal responsibility for many the company’s debts and obligations. 

3. Choose The Right Place to Incorporate

Regardless of where your business actually operates, you can choose to incorporate in any of the country’s 50 states as well as in the District of Columbia. However, it is important to remember that outside of the state in which you incorporate, the law will treat your business as a foreign entity and require you to obtain a certificate of authority or foreign qualification before doing business in your company’s actual physical locality. In most cases, the state in which a company is said to do business is the one in which it: 

  • Maintains a physical presence. 
  • Installs its employees.
  • Keeps a bank account.
  • Accepts client orders.

In general, these guidelines do not apply to companies that operate through mail order or over the Internet. 

Also, Read: All You Should Know About Taxes For A Small Business Employment

4. Learn Your State’s Requirements

Once you have decided upon a state in which to incorporate, you must register your company there. You will need to prepare a certificate of incorporation stating the business’s proposed name, its purpose, the name and address of each involved party and the location of its principal office. 

Your articles of incorporation must also include a detailed description of your company’s bylaws, spelling out the future dates of stockholder meetings; the proposed responsibilities of officers, directors and shareholders; and other vital details. After accepting your submission, the secretary of state in your chosen location will issue your certificate of incorporation. 

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5. Playing by the Law Rules

Despite any assumed protections, the owners of any corporation can find themselves personally responsible for the company’s debts if they fail to follow state rules. It is therefore vital to:

  • Maintain precise financial records. 
  • Separate the owners’ income from that of the corporation.
  • Issue stock, file yearly reports and elect directors and officers on a yearly basis.
  • Include the state’s preference of “Inc.” or “Corp.” when inscribing the company’s name.
  • Identify yourself as a corporate officer when doing business.
  • Never pay business debts with personal checks or use corporate checks to satisfy private obligations.

Although the original setup may seem onerous, the financial advantages of incorporation easily outweigh the inconveniences. However, it is imperative to do it by the books. Outside legal or other professional advice can ensure that you leave nothing to chance and help you to get it done right from the start. 

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