Business Incorporation – Things to Know Before Incorporating a Business

Denise E
Denise E
Senior Financial Editor & Contributor
Last Updated: April 15, 2021
Date Published: March 16, 2021

Incorporating a business means turning your sole proprietorship or general partnership into a company formally recognized by your state of incorporation.

There are four types of corporations: C Corporation, S Corporation, Non-Profit Corporations, and LLC’s (limited liability company).

A corporation is a legal entity that’s separate from its owners.

They offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures.

But if you are a small business owner, you may be wondering if a corporation is really the structure you need for your business.

Here are some Important Things to Know Before Incorporating a Business

Incorporating a Business

Defining Business Incorporation – What is meant by incorporated business?

Incorporation is the legal act of registering a business in order to become a corporation.

Incorporation is what you do, and a corporation is what you are.

When a company incorporates, it becomes its own legal business structure set apart from the individuals who founded the business.

Through incorporation, the company’s owner or owners create a separate legal entity to transact business.

This new business entity corporation or limited liability company (LLC) transforms the way the business is seen through the eyes of the law and often has more credibility with potential customers, vendors and employees.

Corporations can do many things that people can do, including acquiring property, signing contracts, having bank accounts, and filing lawsuits.

Corporations can make a profit, be taxed, and can be held legally liable.

The primary benefit to business incorporation is limited liability.

When you own a small business, you will invest a lot of money into not only getting it launched, but in keeping it running smoothly as well.

As the owner you are responsible for any debts and losses your business may accumulate along the way.

However, when you incorporate, you are typically only held responsible for the amount of money you personally invest.

Your personal assets typically cannot be used to satisfy the debts and liabilities of your business.

Benefits of Business Incorporation

Limited Liability

Corporations and LLC’s (limited liability corporation) are business structures designed to protect business owners from being personally liable for the company’s debts or other liabilities.

For example, if your company declares bankruptcy or is sued, your personal assets such as your vehicle, personal bank accounts, and house are safe.

This protects your personal liability and you are provided limited liability protection.

Tax Savings

One of the greatest differences between LLCs and corporations is how they’re taxed but both offer some great tax savings benefits.

An LLC is taxed as a pass-through entity, meaning that profits pass through to the members and are reported on the owners’ personal tax returns.

The owners deduct business expenses to offset other incomes on their tax return and reduce their personal tax liability.

Reporting profit and losses on personal tax returns typically makes filing taxes for an LLC simpler than it is for a corporation.

Corporations are always taxed as a separate entity.

Corporations are responsible for paying taxes on their profits and shareholder dividends. Because dividends aren’t tax-deductible, they’re taxed twice.

However, corporation-exclusive federal deductions offset this double taxation.

Access to Financing

Once your corporation or LLC is formed, you can start to build a credit history which opens the door to business loans and financing to grow your business.

Both LLCs and corporations must fulfill reporting requirements set by their state.

Since the board of directors must vote on any changes to the business, corporations have to hold an annual shareholder meeting and file annual reports. LLCs, on the other hand, are not required to hold annual meetings or have a board of directors.

Though they have to complete state-mandated reporting retirements, they have far fewer requirements than corporations.

Credibility and trust

Many banks and financial institutions as well as vendors and customers see corporations or LLC’s as credible business entities.

This will help you gain confidence of key players in your industry.

Because a corporation is a separate legal entity with its own tax identification number (similar to a social security number for an individual) a corporation can build credit, borrow money and sell equity to raise capital.

Most investors prefer investing in a corporation or LLC because of the limited liability and ease of transfer of the investment.

Ownership Transfer-ability

A sole proprietorship does not have a life apart from its owner and it may not be transferred to a third party.

The corporation, however, provides an excellent vehicle for transferring ownership: Ownership may be transferred by an exchange of assets for stock.

How do I incorporate my business?

Decide on type of Incorporation

You will first need to decide what type of incorporation you want.

There are four types of corporations: C Corporation, S Corporation, Non-Profit Corporations, and LLC’s (limited liability company).

Choose a State

Most company’s choose to incorporate in the state in which they operate. However, depending upon your company’s needs, you may want to incorporate in a state other than where your business currently functions.

Regardless, you will want to select a state in which to incorporate.

Business Name

Each sate has its own rules regarding business names, but there are a few key things to consider when choosing or editing your business name:

  • Your business name must be different than any other registered business entity.
  • You cannot use certain words like bank (unless you are a financial institution), or FBI (words that can be confused with a government agency), etc.
  • The name must end with “Incorporated”, “Company”, “Corporation”, “LLC”, etc. so that it is known that your company is incorporated.

Business Address

Your business address is simply where your business will plan to receive mail.

Create your Articles of Incorporation

The Articles of Incorporation or Articles of Organization are what officially registers your Corporation or Limited Liability Company and locks in your business name.

Although all articles generally require the same basic information, requirements may vary slightly from state to state.

You will need the following information to complete your articles:

  • Full names, addresses, and contact information for all business owners – the business owners of a corporation are known as the shareholders and they own shares of stock in the business.
  • Full names, addresses, and contact information for all decision-makers – these are called incorporators and directors or LLC Members
  • Business name
  • Address of the corporation or LLC – if your business has multiple addresses, you will need to choose one that will be your official mailing address.
  • Physical address in State of Formation
  • Length of time the company has been in business or has existed
  • Registered agent information (learn more about registered agent here).
  • Description of company‘s business
  • Information about the new corporation or LLC – mission statement and explanation of purpose

Once you’ve collected this basic information, you’re ready to get started on forming your corporation.

In addition to the articles of incorporation, you’ll need bylaws that will guide the way your corporation operates.

Is an LLC an incorporated business?

Yes, an LLC is an incorporated business.

A limited liability company (LLC), also known as a limited liability company, is a business entity that prioritizes the separation of the people in the business and their personal liability.

Similar to other corporation types on this list, an LLC protects members from being financially responsible for damages.

More specifically, an LLC protects the personal assets of the owners in the event of a lawsuit or any kind of financial damages.

Forming an LLC requires articles of incorporation, in which the structure of the business is laid out.

Unlike a C corp, no board of directors is required for an LLC.

In fact, an LLC can choose almost any structure desired, meaning it can imitate an equal partnership, have a board of directors, or fall somewhere in between.

LLCs offer additional perks, including simpler financial structures than corporations, taxation at a personal level (not a corporate level), and the ability to own multiple pieces of real estate under different LLCs to limit taxation.

If you plan on keeping your business close to the vest and don’t intend on going public, an LLC can be a great way to improve your professional appearance and gain certain legal and tax benefits.

What type of business is incorporated?

There are four types of corporations: C Corporation, S Corporation, Non-Profit Corporations, and LLC’s (limited liability company).

If you don’t feel confident incorporating your business on your own, there are incorporating services to help with this!

Here are the best incorporating services for your business!

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  1. SBA.gov "Choose a business structure" Page 1 . April 7, 2021

  2. IRS.gov "Forming a Corporation" Page 1. April 7, 2021

  3. IRS.gov "Tax Information for Corporations" Page 1 . April 7, 2021