how to incorporate a business
there are many steps to incorporating a business each with its own degree of importance below are the following decisions and actions a business owner must take to incorporate prior to incorporating a business should ensure it is adhering to local business licensing and zoning laws this includes having the appropriate permits or licenses to operate though not all businesses may require these by extension this may have implications in to where you operate and ultimately decide to incorporate it s sometimes best to incorporate in the state that the business is operating in as there are different types of applications and filing requirements to file elsewhere for example incorporating in a different state may require you to file a foreign corporation on the other hand filing in a different state may reduce the fees and reporting requirements needed to establish and maintain the corporation many companies choose to incorporate in delaware as the state does not impose income tax on entities that do not do business in the state one of the more fundamental important decisions to make is to establish the business structure the most common forms of business are a sole proprietorship partnership corporation and s corporation an llc is also a common business structure allowed by state statute while this article is focused on incorporation the process of forming a corporation readers should be aware of other entity types that may suit them better should you choose another entity your entity formation process will differ from the incorporation process a business owner should choose the business structure that makes the most strategic and operational sense for the long term as mentioned above corporations can issue stock a very easy way for owners to sell part of the business for personal profit there are also very considerable tax and liability considerations to be had based on the business structure chosen for those unaware of the best course of action it s usually recommended to consult a business attorney to discuss business structure options in this article more of the specific benefits and advantages of incorporating a business are discussed below to incorporate your business name can not be the exact same name as another corporation in your local area you also want a unique name to avoid trademark infringement and branding confusion when selecting that unique name consider that incorporated businesses often end in incorporation abbreviations i e inc there are online directories that can be used to search existing business names these directories allow users to input intended names to see whether they are available some states may offer business owners going through the incorporation process the option to reserve an available name for a period between 60 and 120 days depending on the state a registered agent is a person who has the right and ability to accept paperwork and mail on behalf of the company states will require that a company name a local registered agent as the state will need a contact of someone who will handle official business as items arise the registered agent does not need to be the business owner for example a company s business attorney can serve as a registered agent as long as they have an office within the state the business is being incorporated in should the registered agent move out of the state in which the business is incorporated in the company will need to choose a new agent there are also online legal services that can act as your registered agent in return for a fee as discussed above the articles of incorporation include many important aspects of a company including the business name location information on public or private shares the information of the registered agent and the name of the incorporator each state has its own filing requirements for the articles of incorporation there will be a filing fee to submit the article of incorporation with the state in most cases this is several hundred dollars in addition to drafting the articles of incorporation companies must draft bylaws to outline how your compensation is structured how shares are issued what voting rights are and how the board of directors operate the corporate bylaws are a more detailed set of instructions on how to operate a business very often a company may refer back to its bylaws to better clarify the best course of action to take as it runs some states won t require a copy of these but they may be required by other entities i e financial institutions may require bylaws when setting up a bank account in addition bylaws may be revised to meet the adapting nature of a business at the first initial board meeting the board members will be tasked with performing an important series of actions at that first meeting the board members should formally vote to adopt the articles of incorporation and bylaws authorize and issue shares of stock elect officers and make other operational decisions it is also important that the meeting minutes are taken as certain entities may require a copy of notes as needed there are other operational tasks a business owner should take as it becomes incorporated though independent of the actual incorporation process companies should apply for an employer identification number create a bank account file federal taxes announce the creation of your corporation if applicable and file annual reports as needed incorporation averages about 10 days to be complete but may take a few weeks 2advantages and disadvantages of incorporationincorporation effectively creates a protective bubble of limited liability often called a corporate veil around a company s shareholders and directors as such incorporated businesses can take the risks that make growth possible without exposing the shareholders owners and directors to personal financial liability outside of their original investments in the company because an incorporated business can issue and trade shares this allows for easy transfer of ownership to another party whereas a sole proprietorship must sell the entire company to financially profit from disposing of company equity owners of a company can still retain primary ownership but sell part of their shares for personal profit in addition shares traded on public exchanges are much more liquid markets compared to other means of selling a business an incorporated business may achieve a lower tax rate than on personal income incorporated businesses often receive more lenient tax restrictions on loss carryforwards and may receive more favorable tax treatment for allowable deductions the primary drawback of an incorporated business is the operating constraints to maintain its incorporated status companies must adhere to their bylaws and must ensure it meets filing reporting and other ongoing requirements an argument can be made that since an incorporated entity s tax filing is separate from any individual s there is also an administrative burden angle when preparing multiple tax returns an incorporated business normally experiences double taxation consider an example of a corporation being assessed net income tax then with after tax proceeds it makes a taxable distribution to a shareholder this shareholder now has taxable income on funds that have already been assessed a tax liability operating an incorporated may be more expensive based on the filing reporting and administrative fees companies must often meet public reporting requirements such as getting their financial statements audited there are also ongoing fees and regulatory charges to maintain their status on an exchange last an incorporated business may be considered less flexible in some ways compared to other forms of business once incorporated a business must operate in accordance to its bylaws and articles of incorporation in addition it usually now has an entire board of individuals overseeing operations it may be more difficult for the executives at an incorporated business to dramatically change business strategy or operational considerations protects owners from personal liability as the corporation is responsible for its own debtsmay be much easier to raise capital as shares can more easily be soldmay be easier for owners to personally profit by selling partial stake in company as opposed to needing to sell full ownershipmay receive some favorable tax treatment compared to other business structuresoften requires greater investment of time to meet reporting filing and regulatory requirementsfunds paid to shareholders are exposed to double taxation where both the corporation and shareholders are taxes on the same fundsmay be a more expensive type of business structure due to fees and legal costs