Your great idea is really taking off. What was once an entrepreneurial dream looks like it just might become the next big thing. Therefore, it might be time to make your new business a legitimate corporation. But why would you want to incorporate? How difficult is it to add "inc." to your company name? Can you incorporate on your own or do you need some help? And how much will it cost to become an official corporation in the eyes of your state government?
The primary reason to incorporate is to shield yourself, other owners and your shareholders from liability. Incorporating your business makes it a separate entity from you, the owner. This means that the business won't be impacted by your finances and your personal finances are less likely to be impacted by what happens with the business. For example, if your business is sued, you will not be personally responsible for any damages. Likewise, if you are personally sued, your business will not have to pay any potential costs. Another attractive feature of incorporating is that it gives your business venture a professional identity by adding "inc." or "llc" to its name.
How Do You Do It?
You can handle the incorporating process on your own or you can hire a professional to do it for you. If you choose to do it yourself, you'll need to start at the website of the Secretary of State in the state you wish to start your corporation in. The forms and fees vary from state to state, but in most places you will need to create your "Articles of Incorporation" by following state guidelines. You'll also have to select a name for your corporation, identify a registered agent who is the point of contact for the state and you'll probably have to include details about any shares in your company that are going to be sold. Many states now let you do this online but you’ll also have the option of mailing in your forms with your check.
How Much Does It Cost?
Incorporating fees also vary from state to state. In Arkansas, you can register online for as little as $45 while in Massachusetts it can cost up to $500. If you've done the paperwork yourself, the costs are all transparent. But what if you hired a professional?
Paying For Help
There are attorneys who offer incorporation services for small business owners. Some charge a flat fee for their services, while others bill by the hour. Depending on the firm, a lawyer can cost hundreds or even thousands of dollars. Lawyers argue that their expertise in individual states and their ability to answer questions and file the necessary paperwork makes them worth the cost. Additionally, there are many online firms that will offer to file the necessary paperwork and can give you virtual help with the process. Those companies charge you the filing fee for your state plus additional fees based on how many services they provide. You can usually choose from a menu that begins at $99 plus the filing fee and goes up by hundreds of dollars.
Settling Up With Uncle Sam
What does incorporating have to do with the taxes you'll pay on your brand new business? It depends on what kind of incorporation you create.
- INC. This is a standard incorporation that gives you access to the lower tax rates provided to owners and their corporations. You will need to decide if you're going to be a "C" or an "S".
- C Corporations- C Corporations pay taxes twice. Income that is left over after the business expenses are paid is taxed, and so is income that is distributed to shareholders. This is a tax strategy favored by business owners who are looking for venture capital investors or dream of going public one day.
- S Corporations- This can be a choice for small companies who have fewer than 100 shareholders and no foreign shareholders. Profits in an S corporation only pass through the personal tax returns of the owners. S Corporations cannot be publicly traded. You must apply to the IRS to get this classification.
- LLC (Limited Liability Corporation)- This is an entity recognized by the state, but not by the IRS. This type of incorporation provides liability protection in line with a state's rules, but has nothing to do with how the company will be taxed.
Deciding to incorporate is a big step for any small business and its owner. Becoming an official entity recognized by a state can add polish to a start-up but it's up to you, the business owner, to decide how much you want to tackle alone. Attorneys and online companies can help you navigate the paperwork and Certified Public Accountants may offer the best advice about how to structure your company to minimize your tax liability. It's your great idea and you've gotten this far. Do the research and decide if it's time to add the "inc" to your name.