Incorporating a Business in 2021[Step-by-Step Guide]

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If you’re a business owner and have been in the game for a while, you might have heard about all of the perks of incorporating. But such ventures can be tricky. This article addresses what incorporated businesses are, the main advantages, and how to incorporate your businesses as smoothly as possible.

What Is an Incorporated Business?

Incorporation is the process of shaping a corporation. Incorporated businesses (C corp or C corporation) refer to a section of the IRS code and are not the same as sole proprietorships—they have a set of benefits and advantages that other types of businesses do not have. If you’re the owner of a small business and want to know how to incorporate it, you should consider the steps needed to do so if you want to significantly expand your business.

There are several aspects of incorporating your business that lead to significant shifts in how it runs. The ownership of a corporation is between shareholders, which, in turn, have shares of stock in the business. This new corporation has a board of directors, who these shareholders appoint to supervise the businesses managers and how their work aligns with the shareholder’s visions.

When you incorporate a business, the shareholders have limited liability, meaning that the corporation’s liabilities do not affect the shareholders. For example, the shareholders do not have any monetary repercussions with limited liability if the corporation goes bankrupt. Corporations also pay taxes and are subject to double taxation—paying income taxes on all taxable income and the shareholders paying taxes on the same income (if paid out as dividends).

By starting a corporation, your business can be subjected to legal action. It can own assets and borrow money. Large corporations can be part of the stock exchange and should have an open-book policy on their financial and operational statistics. But a smaller, private corporation (S corp or S corporation) can choose not to share this information with the public.

NOTE: If your business is a company corporation, it has its own credit rating, meaning it doesn’t matter what the directors’ and shareholders’ credit scores and histories are since they are entirely separate from the corporation’s credit report.

Reasons to Incorporate a Business

Even though incorporating may sound like a risky business move, it has a ton of advantages that excuse all of the prep work that’s done beforehand. Some of the main reasons why you should consider incorporating your business include:

Indefinite Business Life

A corporation does not have an expiration date, meaning that your business continues to run no matter what happens with the shareholders, managers, or directors. Starting a corporation enables you to avoid legal tie-ups that could potentially end the business.

Share Transferability

Shareholders can sell their stocks to other potential shareholders without asking for specific permission from other board members—making share transferability seamless and does not require the attention and time of others within the corporation. But founders do have the option to restrict share transferability and establish their corporation as a private corporation instead of a public corporation.

Raising Investment Capital

Incorporating a business assures raising investment capital easier for the needs of your business. Banks are more willing to issue a loan to a corporation than a small business, as a corporation gives your business more credibility. In addition, a corporation can issue shares, which, in turn, makes your business grow. This makes corporations have better sources of capital for other purposes as well, such as paying off senior debt.

Tax Benefits

Company incorporation has certain advantages when it comes to tax rates. They can qualify for deductions and tax benefits that are not offered to individuals, thus making tax rates lower. Some businesses decide to incorporate to lower the amount they owe in self-employment (SE) taxes.

NOTEIncome splitting is a term used in corporations—companies can choose to pay dividends to shareholders even though they’re not actively working for the business. So, for example, your children or partner can become shareholders to redistribute income within the family.

How to Incorporate a Business

There are a few steps that you must take into consideration when incorporating. But always be sure to double-check with lawyers and consultants when making such business decisions. If you wish to know how to do it and act upon it, follow these nine points:

Familiarize Yourself with the Laws and Process

  • The laws of the state – Whichever state you’re operating from, it’s crucial to be up to that state’s legislative protocols. All laws of the state you’re based in applying to your new business venture. (Some online legal services can help clear this up.)
  • The laws of the other states – Sometimes a corporation can have headquarters in another state. But this type of incorporation can be more demanding.
  • Cost, taxes, period, and corporation laws – As with any business, you need to know all the corporation laws. In addition, be prepared to learn about cost, taxes, and period. (Certain LLC services can help with these details and ensure a no-fuss operation.)
  • C Corp, S Corp, LLC – You’ll need to decide whether you wish to open a C Corp, S Corp, or LLC. All have their perks and downfalls, depending on what you’re looking to get out of the incorporation.

Choose and Buy a Business Name

  • Search online directories – All businesses must have a name, which is why you should know which LLC names to choose. Before you start a corporation, pick a name that no other business has. It’s a good idea to first search online directories to see if the name you have in mind is available.
  • Reserve a name – Another option is to reserve a name before you incorporate your businesses if you’re not 100% sure you want to go through with your business idea but still want a name at your disposal.
  • DBA name (in some cases) – A DBA (Doing Business As) is a registered name that is not the legal business name, meaning that it doesn’t provide asset protection like an LLC. So make sure a DBA is a suitable choice for your business. DBA’s are usually used for rebranding purposes.

Appoint Directors

To start a corporation, you must appoint a board of directors to ensure the smooth operation of the business. This essential step takes much time, as it can tremendously impact your business.

File Documents for Incorporation

  • Download and fill out articles of incorporation – Articles of incorporation are needed to incorporate your businesses, which require such basic information as your company’s name, mailing address, a registered agent name and address, purpose, and the names and addresses of your corporation’s directors or your LLC’s members and managers.
  • Submit documentation – When you set up a corporation, submitting the documentation can be done in person, by fax, email, or online. The person submitting the documents can be yourself, a lawyer, or a third-party service.
  • Expect a certificate – After submitting your documentation, and the state has accepted your filing, you’ll receive a certificate that confirms your business’s legal existence.

Prepare Additional Documentation

  • Corporate bylaws – Corporate bylaws are detailed rules that specify how the management is structured, adopted by the corporation’s board of directors. This is a set of documentation that lenders usually request for financing purposes.
  • Shareholders’ agreement – A shareholders’ agreement is a written arrangement between the shareholders of the company corporation that explains the way the business operates and each of the shareholders’ rights. A shareholders’ agreement isn’t necessarily needed, but it’s advised for all corporations with more than one shareholder for emergencies.

Conduct First Meeting

At your initial meeting, you must go through all corporate bylaws and how your new corporation will operate. This meeting with your shareholders will be a great starting point for your new business incorporation.

Issue Stocks

Another aspect to consider when you set up a corporation is the number of shares or shareholders you want your corporation to have. The number of shareholders has a direct impact on the voting rights of your corporation’s members.

Complete Federal and State Requirements

The requirements are:

  • Employer identification number (EIN) – You must first apply for an employer identification number, which is accessible on the IRS website. Corporations must have an EIN. (It’s a good idea to know the difference between a TIN vs EIN ID number.)
  • Business bank account – The next step towards business incorporation is to open a business bank account. As a registered business entity, it’s essential to keep personal and business finances separate.
  • First tax payment – Remember to pay your first tax payment. Federal corporate taxes are due quarterly, and state tax laws differ from state to state.
  • Public announcement – A handful of states, including Georgia, Pennsylvania, Nebraska, and Arizona, have notice requirements for corporations. So, if you’re wondering how to incorporate yourself and your company into the public eye, you need to announce the corporation’s creation in a newspaper, for example, for several weeks.
  • Extra Step for S corps – If you’re looking to function as an S corporation, you must file the IRS form S-2553-Election for a Small Business Corporation, which must be either mailed or faxed to the IRS. This form has to be filed within 75 days of incorporating a business for the election to take effect that same year—or you can file in the preceding year of when you want the election to take effect.

Key Takeaways

Incorporation is the process of creating a corporation.
The ownership of a corporation is between shareholders, while a board of directors represents their best interests.
Company incorporation holds many benefits, such as indefinite business life, tax benefits, share transferability, and ease of raising capital.
Setting up a corporation includes eight crucial steps and one extra one for the S corps.
Make sure to ask for legal advice from lawyers or accountants when incorporating.
NOTE: You must include a registered agent and registered office when incorporating your business. For example, you could be your own registered agent, which entails accepting legal documents issued from the state government and responding on behalf of the company.

Conclusion

Incorporating can be an intelligent move for your business, as it brings many perks to the table, such as tax deferral and ease of raising capital. First, however, suppose you wish to know a way to incorporate a business. In that case, you must follow the basic requirements of choosing a unique name, appointing a board of directors, issuing shares, and filing the required paperwork.

FAQ

How do I incorporate?

There are some steps that need to be taken to incorporate your small business:

  1. Familiarize yourself with the laws and process;
  2. Choose and buy a name for your business;
  3. Appoint directors;
  4. Fill in and file the required documents for incorporation;
  5. Prepare additional documentation;
  6. Hold your first meeting;
  7. Issue stocks;
  8. Complete additional federal and state requirements.
When should you incorporate a business?

As a general rule, if earnings from your business cover your daily needs and more, you should consider leveling up your business to take advantage of the tax deferral that comes with incorporating—an estimate of this would be a business earning over $100,000.

How to incorporate an existing business?

If you’re wondering how to incorporate businesses that already exist, issue stock to shareholders in exchange for liabilities and assets. In addition, you need to create a board of members and officers and file any necessary paperwork and restart operations.

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ABOUT AUTHOR

I’m an entrepreneur by profession and an artist by passion. I do business to pay the bills and make music to bring the thrills. Thanks to a bachelor in Business Administration, I'm well-versed in all things business. Owning a construction company certainly helps, too, but it also brings out my love for building and home protection.

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