There are many benefits to incorporating your business, no matter how small it is. A corporation or limited liability company (LLC) allows you to keep your business debts separate from your personal assets. So, if your business is ever in debt, creditors cannot go after your personal assets for repayment. You will be also able to deduct business expenses when filing your taxes. When you incorporate your business, it also prevents anyone else in the state from using your business’s name. Finally, businesses with “Inc.” or “LLC” after their name seem more credible to customers, clients, and other companies.
Should you incorporate your business or form an LLC?
Business owners can form a S corporation, C corporation, or an LLC. You’ll need to determine which entity is right for your business. Small business owners typically form LLC’s. They are simple to form, and most small businesses don’t need the benefits of corporations. However, in addition to the general benefits of incorporating your business, each type of entity offers unique advantages and disadvantages.
LLC Pros and Cons
- Can have an unlimited number of owners
- Considered a “pass through” entity, so profits and losses are filed on the owners’ personal tax returns.
- Annual meetings are not required
- Stocks cannot be issued
- Income cannot be split between the owners and the business to reduce taxes
Corporation Pros and Cons
- Stock can be issued to gain investors
- Income can be split between the owners and the business to reduce taxes
- S-corps can be “pass through” entities
- Requires annual meetings and recorded minutes
- Profits from C-corps are taxed at both the corporate and personal levels
- S-corps cannot have more than 100 shareholders, and they must be U.S. citizens
Where should you incorporate your business?
Usually, the simplest and least expensive option is to incorporate your business in the state where you live and/or operate. Even if your business operates in multiple states, you only need to incorporate in one state. However, you may need to register to do business in other states. This can include filing annual reports and paying fees to every state you do business in.
But, this only applies to businesses with a physical presence in another state. For example, if you are an online-only retailer or a freelancer with clients across the U.S., you are not required to register with other states. However, if you set up a physical office or store in a different state, you will need to register with that state. You may also need to register if you:
- Frequently meet with clients in-person in that state
- Receive a large percentage of your profits from that state
- Have employees working in that state
- Applied for a business license in that state
Why is Delaware an ideal place to incorporate?
Sometimes, there are advantages to incorporating in a different state. There are several reasons why Delaware is a popular state for incorporation.
- Delaware gives you a variety of options for structuring your business. The business’s officers, directors, and shareholders do not have to be Delaware residents, and you can actually have a single person filing all three roles.
- If you need or want more personal privacy, Delaware does not require you to list the names of officers or directors when forming your corporation.
- Businesses that are incorporated in Delaware but don’t do business there are not required to pay state corporate income taxes.
- Delaware has a Court of Chancery that specializes in corporate litigation and rulings are made by judges, not juries.
- If you plan on going public or looking for investors, venture capitalists and investment bankers usually prefer businesses incorporated in Delaware.
What is the incorporation process?
The process of incorporating your business varies by state. Additionally, you have the option to file yourself, or enlist the help of an attorney or company that specializes in incorporation. To started, you’ll need to contact the state office in charge of registering corporations. This is typically the secretary of state. In most states, you will be able to view the instructions for incorporating, download or fill out forms, and pay any required fees on the secretary of state’s website.
The first thing you’ll need to do is create or fill out your certificate or articles of incorporation. You’ll need to include the name of the corporation and its purpose, as well as the names and addresses of the incorporating members and the address of the business’s primary location. When your articles of incorporation are approved, the secretary of state will provide you with a certificate of incorporation.
What to do after incorporating your business
After incorporating your business, you will have to draft a set of bylaws. The bylaws detail how the business will operate, indicate the responsibilities of the officers, directors, and shareholders, and state when annual meetings will take place. You will also need to apply for any required business licenses or permits.
However, one of the first things you will need to do is apply for an employer identification number (EIN). You will need your EIN for tax reporting, banking services, and to pay your employees. You may also need it when applying for state and local licenses or permits. So, it is important to apply for an EIN immediately after incorporating your business.
We know that the last thing you want to do is fill out more complicated paperwork and wait weeks for your EIN. That’s why we developed a simple, streamlined application process to making applying for your EIN as easy and fast as possible. All you have to do is fill out a short form, and we can get you your EIN in as little as 30 minutes. We take care of all the legwork, so you can focus on running your new business. Click here to start your application and let our EIN experts do all the work for you.