Incorporating is a big step in your small business’s journey. Lenders, investors, vendors, and customers are more likely to take your business seriously when it’s organized as a corporation. Plus, by virtue of the “Inc.” on the end of your business’s name, you and other shareholders will enjoy tax advantages and liability protections.
The process for incorporating a business will differ based on which state you’re doing business in and on whether you’re launching a brand new corporation or converting another business entity to a corporation. We break down the basic steps for incorporation—and the good news is that this isn’t really complicated! You can be up and running as a corporation in just a few weeks by following these steps.
First Up: Incorporation Defined
Incorporation is the process of registering your business as a corporation. Corporations are controlled by three different parties—shareholders, directors, and officers. Shareholders own the corporation (by purchasing stock) and elect a board of directors, who decide matters of policy and management. The board appoints officers (CEO, CFO, secretary, etc.) who run the corporation on a daily basis.
S-corps and C-corps are the two main types of corporations, with C-corps the most popular. C-corps are taxed once at the company level, and distributions of profits (aka dividends) to shareholders are taxed again on shareholders’ personal tax returns. The owner of a C=corp can elect to organize the business as an S-corporation, which is taxed differently. For S-corps, profits and losses pass through to an owner’s personal tax return and are taxed at their personal income tax rate. There are some other differences between S-corps vs. C-corps, but taxation is the main one that small business owners need to know.
You can switch from a C-corp to an S-corp and vice versa at any time in your business’s life, but ideally, you should know which structure you want to use when incorporating.
How to Incorporate a Business: Step-by-Step Instructions
Incorporating a business is actually not as complicated as it might seem. There are just a lot of boxes to check off, and you can expect some investment of time and resources. A typical incorporation takes one to six weeks and costs $100 to $500, depending on where your company is located.
Keep in mind that incorporation is regulated at the state and city level, so you’ll want to be aware of local requirements. Whenever in doubt, you can get state-specific help either by consulting a business lawyer or, for general advice, by contacting your state’s secretary of state office.
Here are the basic steps to incorporate a business:
Step 1: Comply With Licensing and Zoning Laws
Before you can incorporate your business, you should first make sure you’re in the clear with local business licensing and zoning authorities. Although most businesses actually don’t need any permits or licenses to operate, those in regulated industries like food service or child care do. Make sure you’re in compliance with local laws so you don’t have to worry about that once you establish your corporation and begin running your business.
Step 2: Conduct a Business Name Search
Next up is to make sure you choose a unique name for your business. Your local secretary of state won’t allow you to use the exact same name as another corporation in your locality because that could confuse consumers. In addition, choosing the same name as another business could amount to trademark infringement, landing you in legal hot water. As a corp, keep in mind that you’ll have to tag a signifier onto the end of your business’s name, such as Inc., Co., or Corp.
Most secretary of state offices host online name search directories where you can type in your business’s intended name and ensure that it’s available. If your business’s name is available, some states will even allow you to fill out a form to “reserve” it for 60 to 120 days while you complete the rest of the incorporation process.
Step 3: Name a Registered Agent
A registered agent is a person or company that will accept official mail on your business’s behalf. When you establish a corporation, your state will require you to name a local registered agent so someone can receive service of process (if the business is sued) and other official paperwork for your business.
If you have a business attorney, they can serve as your registered agent as long as they have an office in the state of incorporation. A director, officer, or employee of the corporation can also serve as registered agent if they reside in the state of incorporation. If they move out of the state, you’ll have to choose a new agent. Alternatively, online legal services like LegalZoom and Rocket Lawyer charge a yearly fee (around $150 per year) to serve as your registered agent.
Step 4: Draft Articles of Incorporation
The articles of incorporation—called a certificate of incorporation or corporate charter in some states—is a document you have to file with the state to create a corporation. It contains the business’s name and location, number and type of shares, name and address of the registered agent, and name of the incorporator (you, your attorney, or an employee of an online legal service).
Normally, the articles of incorporation is a simple one or two-page document. However, some states require additional information, such as:
- Explanation of the corporation’s purpose
- Names and addresses of the people who’ll serve on the board of directors
- Names and addresses of the officers of the corporation
- How long the corporation will last (it usually lasts forever)
You can usually find and complete the articles of incorporation on your state’s secretary of state website. Or, many online legal companies have fill-in-the-blank articles of incorporation that you can complete and print out on their website for a fee. This can be helpful because the program walks you through each section of the articles.
Hang onto the articles of incorporation when you’re done drafting them because you’ll next be filing them with the state.
Step 5: File Articles of Incorporation With the State
Once you’ve drafted and reviewed your Articles of Incorporation, you’ll need to file them with the state. Expect to pay a filing fee of around $100 to $500 at this stage. You can go directly through your state’s secretary of state website and follow the filing procedures described there, but if it’s easier for you, you can use an online incorporation service like IncFile or LegalZoom. These companies will help you draft the articles of incorporation and file it for you for a fee. Their fees usually range from $50 to $100.
Step 6: Write up Corporate Bylaws
Your corporate bylaws are a document that lays out how your corporation is structured and managed. It contains information about shares, voting rights, shareholder and board meetings, how to replace board members and officers, and other details.
Additional information that might go into the bylaws:
- Number and type of shares that the corporation can issue (if the corporation will issue stock)
- Information about shareholder meetings, board meetings, and the annual meeting that every corporation has to hold
- How the corporation will approve loans, contracts, venture capital, and other transactions
- Frequency and procedure for financial audits and inspection of corporate records
- Fiscal year of the corporation for tax and bookkeeping purposes
- Procedure for amending the articles of incorporation and bylaws
Corporate bylaws are typically much longer and more detailed than the Articles of Incorporation. Although most states don’t require you to file your bylaws, you should keep them safe with your corporate records (more on this next) because you might need to disclose them if you’re audited, need a business loan, or want to raise money from investors.
Step 7: Start a Corporate Records Book
A corporate records book is where you store documents to show the state that you’re operating in compliance with the IRS and state laws for corporations. These are some of the main documents you’ll need to include in your corporate records:
- Copy of the articles of incorporation
- Copy of the corporate bylaws
- Minutes of shareholder, board, and annual meetings
- Stock transactions
- Annual reports
- Business loan documents
- Copies of contracts that the company enters into
- Commercial real estate transactions that the company participates in
Even though it’s referred to as a corporate records “book,” it’s completely fine to store your records securely in the cloud or on your computer—in fact, online storage is probably safer from loss and theft. The records just need to be somewhere you can easily produce them if your business gets audited.
Step 8: Hold Your First Board Meeting
Once you file your paperwork and begin storing corporate records, you’re almost a corporation! But, before you can officially open for business, you have to hold your first board meeting.
During this meeting, the board members will:
- Formally adopt the articles of incorporations and bylaws
- Decide on the corporate seal
- Authorize and issue shares of stock to the initial set of shareholders (sometimes called “capitalizing a corporation”). The issuance of stock is subject to complicated securities laws, so it’s wise to consult a securities lawyer here.
- Officially elect officers such as the CEO, CFO, and others
As with future board meetings, keep a record of the initial meeting’s minutes.
Step 9: Complete Additional Federal and State Requirements
There are some final housekeeping measures before you can officially call your business a corporation:
- Apply for an employer identification number, which is completely free on the IRS website. Corporations must have an EIN.
- Open a business bank account. As a registered business entity, it’s important to keep personal and business finances separate.
- Pay your first tax payment. Federal corporate taxes are due on a quarterly basis, and state tax laws differ from state to state.
- A handful of states, including Georgia, Pennsylvania, Nebraska, and Arizona, have notice requirements for corporations, which means you have to announce the creation of the corporation in a newspaper for several weeks.
Creating a corporation isn’t a one-and-done kind of thing. States often have additional rules that you have to follow to maintain your business’s corporation status. For instance, you usually have to pay an annual fee or file an annual report. Remember to contact the IRS, your secretary of state office, or your attorney if you have any questions as you establish your corporation and in the future.
Wait! There’s One Additional Step for S-Corps
If you’re electing to structure your business as an S-corporation, there’s a 10th step to follow—filing IRS form S-2553-Election by a small business corporation. You must file this form within 75 days of incorporating your business for the election to take effect that year. Alternatively, you can file in the year preceding when you want the election to take effect.
Note that you cannot file this form online; you have to either fill it out and mail it in or fax it to the IRS.
This is the information you’ll be asked to provide in the form:
- Basic business information, such as name and address
- EIN
- State and date of incorporation
- Shareholder information
- Business’s fiscal year
- Date you want the S-corp election to be effective
Make sure you’re clear on the differences between C-corps and S-corps before electing S-corp status.
Converting to a Corporation From Another Business Entity
Many companies that start out as sole proprietorships or partnerships decide to convert to corporations when they start making more money or need to apply for funding or a business loan. Even many owners of limited liability companies (LLCs) are deciding to convert their businesses to corporations in light of the Trump tax plan.
To switch from a sole proprietorship or partnership to a corporation, just follow the steps we outlined above. The only additional things you’ll have to do is dissolve your “Doing Business As” trade name if you have one, and switch over all paperwork and accounts into your new corporation’s name. Also, sole proprietorships and partnerships have to get a new EIN when they incorporate.
Converting from an LLC to a corporation is more complicated because you are fundamentally changing the ownership structure of the business. It can be beneficial to get an attorney’s help here.
Although the methods will vary by state, there are three main ways to convert an LLC to a corporation:
- Statutory conversion (easiest) – Get all LLC members to approve a certificate of conversion and file it with the state, along with other required paperwork, such as the LLC articles of organization.
- Statutory merger (medium) – Have the LLC members form a new corporation and formally exchange their membership rights for shares of stock in the corporation. You’ll have to formally dissolve the LLC.
- Nonstatutory conversion (hardest) – Form a new corporation and draft legal agreements providing for the exchange of LLC membership rights for shares and for the transfer of the LLC’s debts and liabilities to the corporation.
Once you convert your business to a corporation, everything for retaining corporate status remains the same. For example, you’ll have to hold board meetings, maintain corporate records, etc.
Choosing Which State to Incorporate In
The easiest thing is to incorporate in whichever state your business is located, but sometimes there’s an advantage to incorporating in a more “corporation friendly” state like Delaware, Nevada, or Wyoming.
Nevada and Wyoming don’t levy a state corporate income tax or a state personal income tax. Similarly, Delaware doesn’t have a corporate income tax for businesses formed there but doing business elsewhere, and they don’t level a personal income tax on non-residents. Although that might seem attractive, the main thing to remember here is that you can’t escape taxes simply by incorporating in one of these states. For instance, if your company is located in California, you’ll still have to register to do business in California and pay California taxes even if the business is incorporated elsewhere.
That leaves Delaware—where more than 50% of publicly traded US businesses are incorporated. Many business owners choose to incorporate in Delaware because it has a separate court system for businesses and individuals and because investors are more comfortable putting money into a Delaware entity. However, these considerations don’t really apply to small businesses owners who don’t plan on raising venture capital.
The post How to Incorporate a Business: Incorporation Made Easy appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/how-to-incorporate/
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