But how do you do it the right way? If you’ve never started a business before, it can feel pretty daunting. Sure, people start businesses every day, but that doesn’t mean it’s easy.
That’s why we wanted to write a series of articles about the nuts and bolts of setting up a business. We’re starting with the concept of incorporation, then looking at things like entity name, operating agreements, biennial reporting, tax filing, and much more—all the unsexy stuff you’ve got to take care of to make your business legit, manage your tax burden, and keep a “corporate veil” between your personal finances and any business finances.
That awesome idea you have for a business won’t get any traction—or will lose traction quickly—without taking the organization of your business seriously. So, first things first, turning your business into a separate legal entity; the process of incorporation.
Should You Incorporate?
Ok, let’s look at incorporating your business and what kind of corporation is right for the kind of business you want to start, or already have up and running.
One important note: Incorporating your business is not the same thing as registering your business. When you register your business, you are notifying your state that the business exists, but that’s not the same as creating a separate legal entity for your business.
An Entity Identification Number (EIN) should be applied for by any business operating in the United States. The person applying online—also called the “responsible party”—must have a valid Taxpayer Identification Number (SSN, ITIN, EIN).
The “responsible party” is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity.
LLC, S Corp, or C Corp?
To protect your assets and your business, incorporation is an important next step beyond registering the business. You should speak with accountants and lawyers and trusted advisors about your unique situation but here are some broad strokes that define the differences between an LLC, a C-Corp, and an S-Corp.
LLC: A Limited Liability Company (LLC) is not technically a corporation, but this is a method of organization that many business owners choose. LLCs offer more flexibility in the way they are managed and usually have fewer recordkeeping and reporting obligations than corporations.
C-Corp: A C-Corp is a legal entity separate from its stakeholders. Because of this separation, C-Corporation offers strong protection to its owners from personal liability.
S-Corp: S-Corporation status has to do with the way a business has elected to be taxed. Liability protection is similar to C-Corp status. Also, with the S-Corporation, owners can take advantage of “pass-through taxation” meaning the business won’t be taxed at the corporate level. Sweet! So business profit can be taxed at a lower rate and business losses can offset other income on each shareholders’ tax returns.
If you are looking for more details on the differences between these corporate statuses and their advantages and disadvantages, Business Rocket has some excellent resources.
Articles of Incorporation
Whatever entity status you chose, filing is done via articles of incorporation. Articles of incorporation are the documents necessary to register a corporation with a state. If you’ve heard of a business charter, that’s exactly what this is; the legal channel to recognize the establishment of a corporation.
Articles of incorporation outline basic details about the corporation, the mode of governance, and the corporate statutes in the state where the articles of incorporation are filed.
Incorporating your business is a pretty exciting moment. And because of the separation of liability between you and other owners and the business itself, it is also a very necessary step in the building of your business venture.