How to Incorporate Your Business

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Most likely you are already in business and are thinking about becoming a corporation.  Broadly speaking there are two kinds of corporations—private and public.  When a private corporation decides to go “public,” it means it has decided to sell its shares/stock to the general public.   In doing so it believes that its name and products have become well known to the general public who are willing to risk their investment. 

There are several steps you need to take for incorporating as a private corporation.  They are:

1.  Conducting a market research just as you do to start a single proprietorship,

2.  Selecting an attractive name that could easily be associated with your product.

3.  Checking with the U.S. Trademark Office to see if that name has already been taken.

4. Choosing a state you'll file in your papers of incorporation.  You'll pick the state you primarily do business in.  However, if you operate in multiple states, you may incorporate in a state which is more corporate friendly in terms of fees and taxes.  But consult an incorporation service company near you.

5.  Specifying how many shareholders your company will have. This will partially be determined by how many people run the business and what kind of corporation it wants to become.    

Types of Private Corporations

Subchapter S Corporation

A tax election only enables the shareholder to treat the earnings and profits as distributions and have them pass through directly to his or her personal tax return. However, the shareholder, if working for the company, and if there is a profit, must pay him/herself a salary meeting standards of "reasonable compensation". If you fail to do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

C Corporation

A C corporation is the most common corporate structure. The corporation is a separate legal entity owned by the shareholder(s). The shareholders cannot be held personally responsible for the debts of the corporation. The shareholders’ personal liability is limited only to the amount the shareholder has invested in the company.

The shareholders of C corporations may experience double taxation, which means profits of the corporation are reported and taxed first and then if the corporation distributes any portion of the remaining profits to the shareholders in the form of dividends, the shareholders must report the dividend as personal income and pay taxes on it as personal income.

Limited Liability Company (LLC)

The LLC is a relatively new type of business structure that is now allowed in many states. It is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. Formation is more complex than that of a partnership.  The owners can also determine the duration when filing papers and vote to extend it later. However,   LLCs cannot have more than two of the four characteristics that define corporations which are:

v  Limited liability, continuity of life, centralization of management, and free transferability of ownership interests.

The advantages of a corporation are: 

v  Can have an unlimited number of shareholders.

v  Ownership is easily transferable through the sale of stock.

v  Have unlimited life extending beyond the illness or death of the owners.

v  Additional capital can be raised by selling shares of corporation's shares.

v       There may be some tax advantages such as, deductible business expenses.

v       Shareholders are not personally responsible for the debts and liabilities of the business.

The disadvantages of a corporation are:

v      The process of incorporation requires more time and money than other forms of organizations.

v  Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations which increases the cost of running a business.

v  Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.      

After making a decision as to what kind of corporation you would like to become, consider the following options:

v  If you do have the proper know how, you can file the papers yourself.   But when you are dealing with complex legal issues, a mistake could cost you much more later.

v   Consulting an incorporation service company is a much better option that will do the paperwork correctly for a fee but it may not be helpful to offer advice on the structure of your company.

v  Consulting a corporate lawyer is the best option even before you decide to incorporate or not.

To find how to file papers of incorporation in a specific state and for other useful information visit Government Made Easy website  USA.gov  and  Small Business Administration at www.sba.gov

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