How to Incorporate Your BusinessBusiness Incorporation Buyer's Guide
Table of Contents
Creating a separate legal entity for your business can be an excellent way to maximize your earning potential and minimize your personal liability. By choosing the correct legal entity under which to operate and the right incorporation services, you can set your business up for future success. There are several types of business entities. Sole proprietorship, limited partnership, limited liability partnership, limited liability company (LLC), S corporation, and C corporation are some of the most common. Most businesses choose to incorporate (become a corporation) or form a limited liability company (LLC). Both of these business structures limit the personal liability of the business owner. This guide reviews the characteristics of different business entities to help you decide which type might be best for your business. The following are some important characteristics to review and research before choosing a legal entity: £ Formalities and Documentation: is a state filing or other formal business documentation required to start or continue the business? £ Long-term plan for the business: How long do you plan to stay in business? What are the consequences if you or any of your co-owners are unable to continue the business? £ Responsibility for Business Losses or Debts: The type of business entity you choose determines the extent of your personal liability. £ Management: How much control do you want to have over the company's operations? £ Tax: How will your personal tax liability be affected? How will the business be taxed? It might be a good idea to outline specific plans and goals for your company in order to make the right choice. If you are starting a business with another person or people, discuss the specific level of involvement that each person plans to undertake. Will one person make the major business decisions, or will decision making be a collaborative effort? Is one person providing a significant amount of capital (money or equipment) to get the business started? Do you or your co-owner(s) have other income, or other assets, in addition to the business? There are several resources that are available to help you with the decision making process. A qualified CPA or attorney can help you identify any other considerations that might be important factors in making your decision. It is also advisable to speak with business owners that have similar business models to get recommendations. This guide discusses general terminology, issues and general characteristics associated with each legal entity, costs and benefits, and tips for successfully forming a business legal entity. The guide also outlines the different services available for formalizing your business arrangement, and offers suggestions on how to choose the service that fits your business the best.
Being familiar with key terms involved in the formation process is important when you are deciding which business entity to choose. Below are some common terms and their definitions: Articles of Incorporation: If you choose to incorporate, this document must be filed with certain state authorities. The Articles of Incorporation detail the name and primary business of the corporation, the place of business, names of the directors, and amounts and types of stock the corporation is able to issue. Articles of Organization: If you form a Limited Liability Company (LLC) you must file this document. The content is similar to what is contained in the Articles of Incorporation. Contract: An agreement between two or more parties. A valid contract will clearly outline the duties of each party and the consequences if either party fails to fulfill his or her obligation. Corporation: A business entity that is separate from the business owners. Corporations are looked at as a legal person, they can be sued, they must pay taxes, and they have certain rights under various laws. The owners of a corporation are called Shareholders. Copyright: A legal ownership right granted to the creator or distributor of a work product such as a book, article or song. Directors: The decision makers in a corporation. Dividend: A payment to shareholders from a corporation. Foreign Corporation: A corporation that conducts business in a jurisdiction other than where it was formed. General Partnership: A partnership in which each partner is liable for all debts and obligations of the partnership. Incorporation: The process a business undertakes to become a corporation. Intellectual Property: Non-tangible personal property, such as literary or artistic works, patents, appellations of origin, business methods and industrial processes. Joint Venture: A business agreement between two or more individuals that is limited to a single enterprise and involves the sharing of resources, profits, losses and control. Limited Liability Partnership: Partnership in which the liability of all partners is limited. Limited Partnership: A partnership where profits and losses are shared in proportion to each partners capital contributions. In a limited partnership, one partner is usually the General or decision making, partner, and others are Limited in that they contribute to the business financially but are not involved in the daily operations. Non-Disclosure Agreement: A contract stating that information will be kept confidential and will not be given out without proper authorization. Non-profit Corporation: A corporation operating under a specific statute that is not designed for profit-making purposes. All profits must be returned to the organization, rather than paid out to shareholders. Partnership: A business owned by two or more people who are personally liable for all debts and obligations. Partnership Agreement: A contract between partners specifying how the partnership will operate and how profits and losses will be shared. It is not mandatory to have a partnership agreement, but it is advisable. Sole Proprietorship: A business owned and operated by one person who is held personally liable for all business debts and obligations. The owner and the business are considered one entity and profits are reported on the owner's personal tax return. Trademark: An officially registered name, symbol, logo, or sound that identifies a product.
3. Which type of legal entity best suits your business?
The most common types of business structures are Sole Proprietorships, Partnerships, Limited Liability Companies, and Corporations. Within these structures, there are different types of specific legal entities that can be formed. Each has a different structure and allows for a different level of personal liability for the debts or expenses of the business. This section discusses the characteristics of each type of entity, and describes the advantages and disadvantages of each to help you before you choose an incorporation company. A Sole Proprietorship allows for the highest level of personal liability, because the business and the owner are effectively the same. This type of business arrangement requires no formal documentation, and the business owner pays taxes on the business profits as an individual. A Sole Proprietorship is an effective business arrangement if:
It is also important to consider your anticipated earnings. Since your profits will be counted toward your taxable income, you may be bumped into a higher tax bracket. You should also be able to deduct most expenses that are ordinary and necessary to the operation of your business from your personal tax return.
A Partnership can also allow for a high level of personal liability, depending on the type of partnership chosen. Generally, partnerships are governed by a Partnership Agreement. This document specifies the responsibilities of each partner and outlines how profits and losses will be shared. A partnership is a pass through entity, meaning that the entity itself does not pay taxes, the partners pay personal income tax on profits. The two most common Partnership structures are a Limited Liability Partnership and a Limited Partnership. A Limited Liability Partnership (LLP) or Statutory Partnership allows all partners to limit their liability for business debts. Certain documentation must be filed to form an LLP. LLPs allow for pass-through taxation and flexibility in management structure. A Limited Partnership is a partnership with two kinds of partners. At least one partner must be a general partner, where he or she has unlimited liability for business debts. Other partners can be classified as limited, where liability is limited to the amount of their investment. This type of legal entity also allows for pass-through taxation, and income is not taxed at the business level. You might want to consider a Partnership if:
Similarly to a Sole Proprietorship, it is important to consider the effects of the business on your personal earnings. Examine and discuss your long-range strategies with your co-owners to determine if a specific type of partnership would most suit your business goals. A limited liability company (LLC) has some features similar to a partnership: it offers a flexible management structure and flexibility in regards to taxation. The owners of an LLC are called Members. Members of an LLC are still liable to a certain extent for the debts of the entity, but less so than with a partnership agreement or a sole proprietorship. An LLC can elect to be taxed as an entity or to allow profits to pass through to members, like an LLP. LLCâ s are run by Operating Agreements, a document that defines the rights of members. Members have the ability to draft their own rules and bylaws (as opposed to corporations that have rules set by state laws). An LLC is one of the most common business structures. Your business could benefit from becoming an LLC if:
A Corporation allows the highest level of personal protection from business liability. Specific laws govern the formation and operation of corporations. For example, all corporations must file with the state they choose to incorporate in, draft and file Articles of Incorporation and Bylaws, hold annual meetings and take minutes, and file annual reports. A Corporation's owners are called shareholders, and they own a portion of the corporation by buying stock. Most decisions are made by the Board of Directors, who are elected by the shareholders. If you choose to incorporate, you have the choice of creating a C-Corporation or an S-Corporation. A C-Corporation is a separate business entity that is considered a legal person. It pays taxes as an entity, and shareholders also pay personal income tax on dividends, or payments from the corporation. C-Corporations can offer an unlimited amount of different types of stock (such as voting and non-voting) any person or corporation can be a shareholder. An S-Corporation is a pass through corporation, so there is no possibility for double taxation. S-Corps may only issue a pre-determined amount of a single class of stock, and there is a limit to the amount of shareholders that may buy it. Only U.S. residents (not other Corporations) are able to hold stock in an S-Corp. A Corporation is a popular business structure, used by small and large businesses alike. This structure might be a good choice if your business:
An experienced attorney will be able to explain the benefits of each type of corporation to your business and draft all of the required documents. There are also several incorporation services that can help form your corporation and offer advice about which structure to choose. Whichever business structure you choose, it is important to remember that in most cases, you will be entering in to binding contracts with long-term effects on both your business and personal finances. Make sure you have the tools to make a careful and well-informed decision.
If you choose to structure your business as a corporation, you can either incorporate in the state where your company expects to conduct the majority of its business, or in another state. Some corporations that operate in multiple states decide to form in one state even though the business primary headquarters is located in another state. The benefits of incorporation in another state allows for the possibility of tax benefits and flexibility in management structure. You will need to qualify to do business in the state you incorporate in. This can involve higher fees from the business incorporation services and more paperwork if you have chosen to incorporate in a state other than where you operate. It is important to know how the state's corporate laws regulate the rights and responsibilities of shareholders and directors, as well as the rights of creditors. Each state also has a different tax rate, making some states better candidates for incorporation than others. Most businesses that do not incorporate in their home state choose to incorporate in Delaware or Nevada. These states are popular choices for incorporation because both provide incentives and lower tax rates for corporations. Delaware General Corporation Law is very flexible and offers inexpensive incorporation fees. Delaware is also popular is because it keeps corporation statutes and business laws more current than other states, and the Delaware Secretary of State operates more like a business than a governmental bureaucracy. Nevada is a popular choice because, unlike other states, it does not have an annual franchise tax. If you incorporate your business or form an S Corporation in Nevada, you can also take advantage of other benefits. For example, Nevada allows corporate directors and officers to be nonresidents, allows stockholders to remain private, allows one person to hold all corporate offices. Many incorporation services are based in Delaware and Nevada for these reasons. Research whether your business qualifies to incorporate in one of these states- the future savings could be well worth the research time.
5. Forming a Legal Entity- a step-by-step guide Before you decide which business entity is right for you, youâ ll need to collect some basic information about your business. First, you need to choose a unique company name. To make sure the name you want isnâ t already taken, check with the secretary of state and conduct a trademark check. You should be able to conduct both of these searches fairly quickly online. If you plan on operating a website and want to register a specific domain name, you can also conduct a quick online search to make sure that the name you want is available. After you decide on a name, youâ ll need to decide which state to form your legal entity in. Youâ ll also need to evaluate the tax consequences of forming each type of entity. Determine the current size of your company and estimate its potential growth so you can identify which legal entity your business should form under. As already discussed, certain types of legal entities are better for different kinds of businesses. Determine which regulatory requirements and forms you will need to complete. The process for forming the two most common types of business entities, Corporations and LLCâ s, is fairly straightforward. If you form an LLC, you will need to file Articles of Organization. If you choose to form a corporation, you will be required to file an Articles of Incorporation document and bylaws with the state. If you form a corporation, you will also need to issue stock certificates to shareholders, document all corporate actions and keep meeting minutes, and elect officers and directors of the corporation. Finally, for each type of entity, you will need to contact the IRS to obtain your state and federal tax ID numbers (like a social security number for your business). There are many available resources you can reference to guide you through the process of business incorporation services and assist you with all the necessary paperwork. A qualified attorney or incorporation service should be able to guide you smoothly through the process.
6. Costs of registering your business While it is not necessary to hire an attorney or a CPA to incorporate, it is highly advisable that you speak with qualified professionals or an incorporation company prior to forming a business entity. An attorney can advise you as to the type of business model that accommodates the level of liability you are comfortable with. A CPA will be able to evaluate the financial and tax consequences of forming each type of business structure. After you have decided which type of business legal entity best fits your business model and where you would like to incorporate or file, you have two choices as to how to proceed: You can choose to have your attorney prepare and file all of the necessary documentation, or choose to hire an incorporation service. The main benefit of hiring an attorney to complete the process is assurance that all of your documents will be prepared and filed correctly. The cost for preparing the organizational documents for a corporation or LLC corporation varies greatly depending on the complexity of the business structure, the state of incorporation, and the desired management arrangement. Hiring an attorney to incorporate your business can be costly, depending on the amount of time he or she spends preparing your documents. Most attorneys charge a flat fee of several hundred dollars, but the more complex your business, for example, if you have several shareholders and several kinds of stock, the more expensive the attorneyâ s fees. You can also find an online service to guide you through the process and fill out the necessary paperwork. Online services prepare and file necessary paperwork for a flat fee (usually a few hundred dollars), which is generally less than an attorney would charge. Using an online service might be a good idea if your business model and management structure are fairly simple. If you decide to use an online resource, shopping around to find the best possible rates and most competent company can save you money in the long term. Whether you use an attorney or an online service, you will also need to pay filing fees to the state where you choose to register. Government filing fees are based on business type and the state the business is incorporating in, and can range anywhere from $25 to $1,000. Some states require business licenses, which can usually be purchased for a small fee. Rules vary by state with regard to annual report fees and other expenses. It is a good idea to check with the state you are filing in to see if any other fees are associated with the formation or operation of your business.
7. Tips for successful business formation Forming a business entity and choosing incorporation services are important decisions that can have a long-term impact on your future earnings. Here are some tips to follow to make sure you get the best results. £ Capital - Consider whether or not you will be raising capital through shareholders or your own sources. This can have a big impact on the type of entity you ought to form. £ Taxes- Evaluate your personal tax situation. Will you be gaining income through the business alone, or do you plan to have a â day jobâ or other salaried position while the business gets going? How profitable do you expect the business to be, both in the long and short term? Reviewing your situation can allow you to form the type of business entity that best minimizes your tax obligations. £ Liability- How comfortable are you having your business and personal finances intertwined? Some forms of business, like Sole Proprietorships, offer no protection to your personal assets if your business is sued or defaults on a debt. Be aware of the level of liability protection you will need. £ Seek Help- Discuss with an attorney, CPA, tax preparer, LLC consultants other businesses- this is an important decision, and you want to have the most reliable information possible. £ Business Control- How much control do you plan to maintain over your business? £ Cost â The cost of incorporation can be as small as $99 to over a couple thousand dollars, depending on how you choose to have your documentation prepared. Research incorporation fees and LLC services while shopping around.
|
link one
This content requires the latest Adobe Flash Player and a browser with JavaScript enabled.
Click here for a free download of the latest Adobe Flash Player.
link twoYour Opinion Counts |
