Want to Inc. a business? This refers to incorporating or forming your business entity as a corporation.3 min read
Want to Inc. a business? This refers to incorporating or forming your business entity as a corporation. The decision comes with advantages and disadvantages, so it’s important to review both sides before you determine how to form a business.
A corporation is a legal business entity that exists separately from its owners. The owners of a corporation must draft articles of incorporation for the business, and then file that document with the proper authority in the state in which the business will operate. The final step in incorporating is paying all required fees. When a business is incorporated, it starts as a C corporation. One of the requirements of C corporations is paying income tax on all income earned by the business. If a corporation wishes to be taxed as an S corporation, it must file Form 2553 with the IRS.
When formed as an S corporation, a business entity can pass the net income and losses through the company to its shareholders. The shareholders then report the income and losses on their personal tax returns each year. The benefit of this type of business formation is that the corporation isn’t subject to double taxation or taxation at both the corporate level and the shareholder level. Double taxation does apply to C corporations. In order to form an S corporation, also referred to as a Subchapter corporation, your business must have 100 shareholders or fewer.
You don’t have to work with a lawyer to incorporate your business in any state except South Carolina. In this state, the signature of an attorney must be included on the forms used to form a corporation. However, in all other states business owners can complete and file the articles of incorporation themselves.
Naming a Corporation
Before you incorporate your business, you’ll need to come up with a name. Each state has its own rules for business names, but the most common rule across all states is that a business name can’t be confusingly or misleadingly similar to an existing company’s name.
Additionally, you must include one of the approved suffixes in the business name:
All states enforce their own suffix requirements and standards.
Advantages of a Corporation
The main benefit of forming a business as a corporation is the limited personal liability for business debts and liabilities. In most cases, the shareholders of a corporation aren’t held personally responsible for any of the business obligations or debts. One exception to this rule is if a shareholder personally signs on a loan that the corporation later defaults on, this would require the shareholder who signed to be held responsible. Otherwise, the shareholders’ personal assets are shielded from liability.
In other business formations, such as partnerships and sole proprietorships, limited personal liability doesn’t apply. Corporations also have access to tax advantages that aren’t available to other business entity types. For example, a corporation set up makes it easier to administer qualified retirement plans, such as 401(k)s, and retirement funds.
A corporation’s lifespan also isn’t limited, nor does it depend on its members’ involvement. A corporation remains as a legal business entity, even if its owner(s) pass away or sell their ownership in the business. Corporations have centralized management structures. A corporation’s ownership can be transferred easily. It’s also easier to raise capital since stock can be sold for the business.
Requirements to Incorporate
In most of the states, a corporation must name a registered agent. This registered agent is required to reside in the state in which the business is registered. The agent must be available to receive service of process or official state documents during normal business hours. Additionally, most states allow a single individual to serve in all officer roles, as well as the shareholder and/or director roles.
When issuing stock for your corporation, you must assign a value. This can be either the dollar amount you choose for each share or no par value. Certain states require corporations to issue the stock at a rate that is no less than its par value. In other states, the fees for incorporating are established by multiplying the par value of each share by the number of shares approved.