If you are considering starting a new business, then incorporation may be the next step in your planning process. Incorporating is important for many reasons, but one of the most significant is that it will allow you to protect your personal assets from any liabilities that arise with operating and running the company. This article will discuss how to incorporate your business and why it’s an important first step!
What is a corporation, LLC, and partnership?
A corporation is a company with a legal personality separate from its owners. A partnership is a group of two or more people who are involved in business together and share the profits and losses equally. An LLC, also known as a “limited liability company” provides limited liability to each owner up to their investment amount per state law.
It is important to understand the differences between each entity type – for example if you have an S Corporation (a small business that files taxes separately) versus an LLC where income can be passed through without being taxed at both levels (taxed only once).
Incorporating your business – what you need to know
When it comes to incorporating a business, there are several things you must be aware of. If you are a sole proprietor of your business, which is the easiest route to go when starting out with an online or brick-and-mortar store, then there isn’t much involved. You can register as a business in most states by simply completing an application at the state level and paying some fees.
However, if you plan on hiring employees for your business, you might consider a different entity type. It is important to know that an LLC or corporation will allow the company to shield its personal assets from liability, and file a separate tax return. The other perks of incorporating your business should be considered as well:
- Separate legal entity
- Ability to raise money through loans or investments
- No risk of losing house due to lawsuits
How to incorporate your business
The method for incorporating is similar from state to state, with some important differences you must check into before proceeding. In general, you can incorporate by simply completing an application at the state level and paying some fees.
There are some record-keeping requirements that must be followed.
There are also a few other things you will want to do after incorporating:
- Set up bank accounts for your business
- Get an Employer Identification Number (EIN) from the IRS. This is what employers use to report wages and withholdings on employees’ paychecks, so it’s necessary if one of your goals is to have a staff of people.
By carefully handling this process, you are ensured of protecting your personal assets and will limit personal liability. Your company, on the other hand, could be on the hook. This is why choosing the right legal entity is so important.
The importance of incorporating your business
As a small business, you have come to the crucial point of deciding whether or not it will be more beneficial for you to incorporate. This is especially true if your business has an LLC and/or employees on the payroll. When this becomes necessary (as defined by state law), it can provide significant tax advantages as well as liability protection.
This is a decision that must not be taken lightly. You must consider tax ramifications as well as the cost of upkeep for the entity. But, by incorporating your business you will have the option of a number of different types of companies that could offer protection and benefits for all sorts of needs.
Corporations are like living and breathing entities. Whether you choose C-corporations or S-Corporations, the benefits outweigh any other issue. It is your company, so you will want to do it right.
Choosing the right type of incorporation for your company
There are 2 types of ways to incorporate in the United States. The first is the C corporation, which can be best for companies that are large and have a lot of shareholders. The second type is an S corporation, which will usually work better for smaller businesses with fewer owners.
When it comes to choosing between these two types of incorporation you should think about what your needs are as a company in order to decide the right path to take.
C Corporations – protects the company from liabilities and shareholders are taxed on their share of profit.
S Corporations- ensures limited personal liability for its owners, but profits must be distributed to them annually in proportion to ownership shares.
Benefits of incorporating your company
We have already alluded to some of the many benefits of incorporation. The first one is liability protection. A C-Corporation has limited personal exposure to its owners, while an S Corporation provides even greater limits on that exposure.
Another benefit of incorporation is asset protection and its high-level tax treatment. The tax breaks can be incredibly helpful to your business.
A corporation has the ability to sell shares of ownership, which is not possible with a sole proprietorship. There are many reasons for this such as controlling share dilution and benefiting from corporate tax rates on dividends that may be higher than individual taxes.
Be sure to consult with a professional before making this important decision for your business.
What can you conclude about incorporating?
- Incorporating can have many benefits including protection of assets and high-level tax treatment.
- A corporation is able to sell shares, which a sole proprietorship cannot do. This gives ownership control that a sole proprietor does not have.
- It’s important to consult with an attorney before making the decision on what to do with your company. If your company has the potential to end up in a lawsuit, you should truly consider incorporating it.