Top 10 Questions and Answers About Small Business Incorporation

Top 10 Questions and Answers About Small Business Incorporation

by Jane Haskins, Esq., August 2014

If you’re a small business owner, you’ve probably heard that forming a corporation is a great way to limit your personal liability for your company’s obligations. But you may have questions about how to incorporate and whether incorporating is right for your business.

Here are answers to some of the most common questions:

1. Should I form an LLC or a partnership instead of a corporation?

Like a corporation, an LLC, or limited liability company, limits its owners’ personal liability for company debts. However, corporations have certain features that LLCs do not have. Corporations issue shares, which are easily transferrable from one owner to another. As a result, many outside investors have a strong preference for investing in corporations. Corporations may also be taxed differently than LLCs, and some businesses benefit from corporate tax treatment.

If you have business partners and have not formed any sort of business entity, your business is a general partnership. A general partnership does not offer its owners liability protection for partnership debts and obligations. For this reason, it’s usually a wise idea to form a corporation or LLC rather than remain a partnership.

2. What do I need to do to incorporate a business?

To form a corporation, you must file incorporation documents with the secretary of state or other state agency that handles business filings. Each state has its own forms, rules and procedures for doing this. After you’ve filed incorporation papers, you will receive a certificate or other document from the state confirming that your corporation exists.

3. I heard that I should incorporate in Delaware. Is this a good idea?

Many large companies are incorporated in Delaware because Delaware is known for having a well-developed body of law that’s favorable to corporations.

However, if your company only does business in one state, it’s usually better to incorporate in your home state. Incorporating in another state carries additional costs, since you will need to hire a registered agent in that state and file additional papers to register to do business in your home state. You may be required to file annual reports and pay taxes in two states, and if you are ever sued, you could wind up defending the case in the distant state where you incorporated.

4. I’m a freelancer. Can I form a one-person corporation?

Yes. A corporation can have just one shareholder, or it can have many shareholders.

5. What’s an S corporation and how do I set one up?

For tax purposes, the Internal Revenue Service classifies corporations as either S corporations or C corporations. A C corporation pays corporate income tax on its profits, and shareholders are also taxed on the money they bring home. S corporations are not taxed at the corporate level, but shareholders report profits and losses on their personal tax returns. Many small business owners choose S corporation status to avoid being taxed at both the corporate and personal level.

Once you have incorporated your business, you can elect S corporation status by filing form 2553 with the IRS. If you don’t file form 2553, the IRS will automatically treat your corporation as a C corporation. Forms and requirements for S corporations are available on the IRS website.

6. What’s a professional corporation?

In some states, professionals such as doctors, lawyers, accountants and architects must form a professional corporation. A professional corporation works the same way as any other corporation, but it may have specific restrictions on the type of name it can have or on who can be a shareholder. In some states, you must obtain permission from the appropriate professional licensing board to form a professional corporation.

7. What’s a registered agent?

Every state requires its corporations to have a registered agent, also sometimes called a statutory agent. The registered agent is a person that you designate to receive lawsuits, subpoenas and other official documents on behalf of the corporation.

Most states allow anyone over the age of 18 to serve as registered agent, including a shareholder or officer of the corporation. There are also companies that provide registered agent services for a fee.

8. Do I need bylaws for my corporation?

Many states require corporations to have bylaws. Bylaws are an internal document that describe the way your corporation will operate and make decisions. They are not filed with the state, but are kept with your corporate records.

Bylaws describe such things as the number of directors and officers and their duties, the rights of shareholders and the way that shareholder meetings will be held. They can also describe procedures for selling shares or dissolving the company if it goes out of business.

Small business owners are sometimes tempted to skip bylaws because they mistakenly assume they’ll always be able to work things out informally with their business partners. But conflict is inevitable in most businesses, and bylaws are a relatively inexpensive way to ensure that when a conflict does arise, you’ll have guidelines and procedures for resolving it.

9. What does it cost to form a corporation?

Every state charges a fee for filing articles of incorporation, but the exact fees vary from state to state. In many—but not all—states, the fee is $125 or less.

Other costs for incorporating might include fees to have someone prepare and file incorporation papers for you, fees for advice from an attorney or accountant, and fees for a professional registered agent company.

10. Should I include the word “Inc.” in my corporation’s name?

Nearly every state requires you to include a word in your corporation’s name that identifies it as a corporation. Usually, this means that your corporate name must end with “incorporated,” “corporation” or “company,” or an abbreviation of one of those words, though the requirements vary a bit from state to state. By including one of these words, you ensure that the people you do business with know that they’re dealing with a corporation and not you individually.

Understanding the procedure and terminology for forming a corporation in your state can help the small business incorporation process go more smoothly. Once you’ve formed your corporation, be sure to keep your corporate records in a safe place and file any required reports with your state when they’re due.

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