How to incorporate your business

Business owners are excited about change and improving their personal and business position. There are many reasons that a business owner would need to change the type of structure they use and after having sustained significant growth, many businesses choose to incorporate themselves. A very important question for you to ask might be: Should I try and become a corporation? Here are some things you should know to help you decide.

Should you incorporate your business; advantages and disadvantages

Advantages

Many small business owner's think about incorporating their business at some point. The form a business isn't carved in stone and you can make changes and adjustments as needed so that it works best for you in the current social and economic conditions present. Many small businesses start out as sole proprietorships or partnerships and then become incorporated later in the history of the company. One of the biggest reasons that business owners change from a partnership to a corporation is because of the limited liability status of a corporation. In a partnership or sole proprietorship, the owners of the business are solely responsible for the debts and liabilities of the company. Incorporation takes much of this burden away. If you were a sole proprietor, you whole life could be tied to your business. If the business went under or was sued by someone, you could end up losing your car, your home and any other personal assets to settle the debts or the lawsuit. This is a crushing burden that prompts many people to change the way their business is structured.

Another advantage of a corporation is that it can continue on after the founder has moved on or passed away. There is no time limit on a corporation like there could be on a sole proprietorship. A corporation continues to exist even if the shareholders die or leave the business and the business changes hands.

It is also easier for a corporation to raise money than a smaller business. Capital is necessary for your business to grow and corporations can borrow money but can also sell shares to the public to help raise capital. This type of financing does not incur any debt and also doesn't require interest to be paid. Another advantage is that you can decide when you will receive money which could be a tax benefit for you. There are also more opportunities to defer taxes until later which could result in further tax savings. You may also qualify for a small business deduction which may be a much lower tax rate than applied to personal income.

Another major advantage is the image that goes along with incorporation is that of an improved image. When your company name is followed by LLC, or Corp., you will likely be taken more seriously and may get additional revenue that was not there before. All these things may be advantages to you but there are also some disadvantages that should be considered.

Disadvantages

When you incorporate your business you are going to have to file two tax returns each year; one for the business and one for your personal income. This can result in what is referred to as "double taxation". You are taxed on the money your business earns and then taxed on the money your business pays you after having already paid taxes on it. But if the business reports a loss, you will get no benefit from it in your personal tax returns.

There is also a lot more paperwork and bureaucracy involved in maintaining a corporation than many other types of business. You have to maintain records that may not be required under other forms of business and keep track of all the proceedings inside the company. Corporations are also not eligible for tax credits that could be given to a sole proprietor and there is also much less flexibility with taxes than a partnership.

Another aspect to keep in mind is that a corporation does limit your liability but does not entirely remove it, especially when you are not a responsible business owner. Liability really doesn't matter much if no one will lend the business any money at all. And a lack of money almost assuredly means failure. It is also very expensive and complicated to register a corporation, much more than other forms of business.

Different types of corporations to consider

There are a few types of corporations that you could choose from when and if you decide incorporation is right for you business. Taxation and liability benefits are usually the main reasons business owner will choose to incorporate their company. You are less liable for the actions of employees and you will be able to have more tax shelters for you personal income and property as well.

The first type of corporation is called a Limited Liability Company or LLC. This combines the rights and responsibilities of a partnership and corporation together. Many people consider an LLC to be a hybrid of the two. Shares of the company can be sold to people who then become members. These members then manage the business and the people who have the most shares have the most say in what happens in the business. In an LLC, each person is responsible for their own actions but aren't liable for the actions of employees, which could end up being a huge advantage later on. An LLC does not pay taxes itself but each member pays taxes on the portion of income they report as their share of the business.

Another type of corporation is the C-Corporation. In this scenario, shareholders selects a single person to act as head and develop the policies and practices of the business. Personal assets can still be at risk through litigation, but the assets of the business are taken first. Under this form, the corporation pays taxes on its revenue and the employees also pay taxes on their personal income from the company.

Another form is an S-Corporation. The only difference between this and a C-Corporation is that it does not pay federal taxes but can not have more than 35 members in the corporation.

When you are deciding which type of corporation you should consider, it is wise to consult an attorney or other legal counsel to determine what best fits your needs.

How to incorporate your business

So how do you incorporate your business? There are several key steps that need to be followed to make sure that it works how it should.

The first decision you should probably make is if you really need to incorporate or if it is just something that would be cool or convenient. You need to understand and carefully consider all the aspects of incorporating before jumping in head first. It will limit your liability but you need to understand in what ways and if those ways are important enough for you to justify the time and expense that will be involved.

If you do choose that corporation is right for you and your business then you need to decide what type of corporation to form. In the U.S. the two major forms are corporations and Limited Liability Companies or LLC's. Each type has different tax implications and differs from state to state. You should find out what the rules and regulations are in the state you will be doing business so you can make the best decision.

You have several options when the actual process is to be done. You can choose to do the incorporation yourself, to use an Incorporation Service Company, or hire an attorney to do the work for you. Of course there will be costs associated with each from of application. You need to weigh your options and decide which is best for you.

Once the corporation is actually formed, then you will need to file different documents regarding taxation and other legal filings. Again these will differ from state to state and you should carefully consider and understand the process before beginning.

Tips and warnings

It is a good idea to consult with your accountant before making the leap into becoming a corporation. They may be able to tell you which type of corporation is best for you. Health insurance might be completely deductible under a C-Corporation but only up to 40% in an LLC. This is an increasingly common concern with the problems plaguing the health care industry.

If you do choose to set up an LLC or corporation on your own, you should first familiarize yourself with the process and make sure that you understand everything first. Making a mistake and doing something illegal does not exempt you from the consequences. Having a corporation set up improperly can cause nightmares later on if you haven't taken all factors into consideration. It could also cost you and your company money down the road if it is done improperly. As with any business decision you should inform yourself as best possible and then make a decision based on information. But if something does feel out of place, you may need to reevaluate the situation and take another approach.