How to Incorporate a Business (+ Understanding the Corporate Entities)

Incorporating your business is a significant step that can bring numerous benefits, from legal protections to potential tax advantages.

But what exactly does incorporation mean, and how do you navigate the process?

In this guide, I'll:

• Break down the basics of incorporation,
• Explore the different types of entities you can choose,
• Walk you through the steps to get your business officially incorporated,
• And I'll also cover the benefits and tax implications of incorporation.

Let's get started!

So, what does incorporation even mean?

Incorporation is the process of legally forming a business entity that's recognized as separate from its owners.

This entity, typically a corporation, can own property, sue, enter into contracts, and pay taxes independently from its owners.

Learn more — here are some key points about incorporation:

• Separate legal entity: Incorporation creates a distinct legal entity separate from its owners (shareholders). This separation provides personal liability protection, meaning the owners' personal assets are generally not at risk if the company incurs debt or faces legal action.
• Limited liability: One of the main benefits of incorporation is that it limits the owners' liability to the amount they have invested in the company. Their personal assets are usually protected from legal claims and debts.
• Tax benefits: Incorporated businesses may benefit from potential tax advantages, such as lower corporate tax rates, the ability to deduct certain expenses, and the opportunity to retain earnings in the company.
• Raising capital: Corporations can raise capital more efficiently by issuing stock. This makes it easier to attract investors and grow the business.
• Perpetual existence: Unlike sole proprietorships or partnerships, a corporation can continue to exist even if the owners change or pass away. This continuity is beneficial for the long-term stability of the business.

Incorporating can be an essential step for businesses looking to protect their owners, grow, and establish a professional presence.

What are the 7 different entities you can incorporate?

When deciding to conduct business, it's essential to choose the right entity that aligns with:

• Your goals,
• Operational needs,
• And legal requirements.

Incorporation can offer benefits like liability protection, tax advantages, and increased credibility, but the type of entity you select will significantly impact your business's structure and functioning.

Below, I'll explore the different types of entities you can incorporate, helping you understand the options available so you can make an informed decision for your business's future.

1. C Corporations (C Corp)

A C Corporation (C Corp) is a standard business structure that provides limited liability protection to its shareholders, separating personal assets from business liabilities.

It allows for unlimited shareholders, making it easier to raise capital through stock issuance — however:

C Corps face double taxation, where both the corporation's profits and shareholders' dividends are taxed.

This structure is ideal for businesses looking to grow, attract investors, and operate on a larger scale. Still, it requires compliance with regulatory requirements like regular reporting and maintaining corporate records.

2. S Corporations (S Corp)

An S Corporation (S Corp) is a special type of corporation that offers the benefits of limited liability while allowing profits and losses to pass through directly to shareholders, avoiding double taxation.

This pass-through taxation can result in significant tax savings, especially for smaller businesses.

S Corps are limited to 100 shareholders, all of whom must be U.S. citizens or residents, and cannot include corporations or partnerships as shareholders.

This structure is ideal for small to medium-sized businesses looking for tax efficiency and liability protection while maintaining a simpler corporate structure.

3. Limited Liability Companies (LLC)

A Limited Liability Company (LLC) combines the liability protection of a corporation with the tax flexibility and simplicity of a partnership.

LLC owners, called members, aren't personally liable for the company's debts or legal obligations.

LLCs offer pass-through taxation, meaning profits and losses flow directly to the members' tax returns, avoiding corporate-level taxes.

This flexible structure allows various management structures and fewer formalities than corporations.

LLCs are popular among small business owners for their simplicity, protection, and ability to choose how they're taxed (as a sole proprietorship, partnership, or corporation).

4. Nonprofit Corporations

A Nonprofit Corporation is a business entity formed for charitable, educational, religious, or public service purposes rather than generating profit.

Nonprofit corporations enjoy tax-exempt status under IRS Section 501(c)(3) if they meet specific requirements, allowing them to focus on their mission without the burden of federal income taxes.

Profits generated by the organization are reinvested into its mission rather than distributed to owners or shareholders.

Nonprofits can receive donations, grants, and other funding that are often tax-deductible for donors, making them an ideal structure for organizations committed to serving the public good.

5. Professional Corporations (PC)

A Professional Corporation (PC) is a specific type of corporation designed for licensed professionals, such as:

• Doctors,
• Lawyers,
• Accountants,
• And architects.

PCs provide limited liability protection, separating personal assets from business liabilities related to malpractice or business debts.

However, personal liability for professional negligence isn't protected, meaning each professional remains accountable for their own actions.

PCs often have stricter regulations and are typically required by state law for certain professional services.

This structure allows professionals to benefit from tax advantages and liability protection while maintaining compliance with industry standards and regulations.

6. Close Corporations

A Close Corporation is designed for a small number of shareholders, often family members or close associates.

It operates more informally than a typical corporation, with fewer regulatory requirements and no need for a board of directors or annual meetings.

Shareholders usually manage the company directly, allowing for more control and flexibility in decision-making.

Close Corporations also have restrictions on the transfer of shares to maintain control within the existing group.

This structure is ideal for small businesses that want the benefits of incorporation without the formalities of a traditional corporate structure.

7. Benefit Corporations (B Corp)

A Benefit Corporation (B Corp) is a for-profit entity that combines the legal structure of a traditional corporation with a commitment to social and environmental responsibility.

B Corps must consider its decisions' impact on all stakeholders, including employees, customers, the community, and the environment, not just shareholders.

This structure provides legal protection for companies pursuing a broader mission beyond profit.

Benefit Corporations must meet specific performance, transparency, and accountability standards and often seek certification from third-party organizations.

This structure appeals to businesses that prioritize purpose and impact alongside financial success.

The incorporation process for your business — just 10 steps!

Here's a more detailed look at the 10-step incorporation process for your business:

1. Choose a business name: Select a name that reflects your brand and isn't already used by another business in your state. Check for name availability with your state's business registry and ensure it meets any naming rules, such as including terms like "Corporation," "Incorporated," "LLC," or abbreviations as required by the state.
2. Select a business structure: Decide on the legal structure that best fits your business goals and needs. Options include C Corporation, S Corporation, LLC, Nonprofit, and more, each offering different benefits regarding liability protection, tax treatment, and ownership flexibility.
3. Appoint directors or members: Corporations require a board of directors who oversee major decisions, while LLCs appoint members or managers responsible for the business's day-to-day operations. Typically, this step involves deciding on initial directors or members and their roles within the company.
4. File articles of incorporation: Submit the necessary formation documents, such as Articles of Incorporation for a corporation or Articles of Organization for an LLC, to the appropriate state agency, usually the Secretary of State. This document includes basic information about your business, such as name, address, and the names of the initial directors or members.
5. Obtain an Employer Identification Number (EIN): Apply for an EIN from the IRS, which acts as the business's tax ID number. This is necessary for tax filings, hiring employees, opening a business bank account, and other official business activities. You can apply for an EIN online through the IRS website.
6. Draft corporate bylaws or an operating agreement: For corporations, bylaws outline the rules for governance, such as how meetings are conducted and how decisions are made. For LLCs, an operating agreement details the ownership structure and operating procedures. Although not always legally required, these documents help prevent disputes and clarify roles.
7. Issue stock or membership interests: Corporations issue stock to shareholders as evidence of ownership, while LLCs distribute membership interests to members. This step involves creating stock certificates, maintaining a stock ledger, and establishing the number of shares or membership units.
8. Comply with state and federal regulations: Depending on your business type and location, you may need to obtain various licenses and permits. This could include general business licenses, industry-specific permits, or zoning clearances. Compliance ensures your business operates legally within your jurisdiction.
9. Open a business bank account: Keep your business finances separate from personal accounts by opening a dedicated business bank account. This step is crucial for maintaining clear financial records, simplifying tax filing, and reinforcing the limited liability protection provided by incorporation.
10. Maintain compliance and corporate records: Stay in good standing by adhering to ongoing requirements such as filing annual reports, paying required fees, holding regular meetings (for corporations), and keeping detailed records of major business decisions. Regular compliance helps avoid penalties and keeps your business legally protected.

What are the benefits of incorporation?

Incorporating your business offers several key benefits:

1. Limited liability protection: Incorporation separates personal assets from business liabilities, protecting owners from personal responsibility for the company's debts and legal actions.
2. Credibility and professionalism: Incorporation enhances the business's credibility with customers, suppliers, and potential investors, often making it easier to secure contracts and financing.
3. Tax advantages: Corporations benefit from various tax deductions, lower corporate tax rates, and the ability to retain earnings within the company for reinvestment.
4. Access to capital: Incorporated businesses can raise funds more easily by issuing stocks or other securities, providing opportunities for growth and expansion.
5. Perpetual existence: A corporation continues to exist independently of its owners, ensuring business continuity even if ownership or management changes.
6. Transferability of ownership: Ownership interests in a corporation are typically easier to transfer through the sale of shares, facilitating succession planning or exit strategies.
7. Attracting talent: Corporations can offer stock options and other incentives to attract and retain skilled employees, providing a competitive edge in the job market.

Understanding taxation

As a business owner, understanding taxation is crucial for making informed business decisions and ensuring compliance with tax laws.

Business taxation varies depending on the entity type and can significantly impact a company's profitability and financial planning.

Key aspects include:

• Types of taxes: Businesses may be subject to corporate income tax, sales tax, payroll tax, and other state or federal taxes, depending on their operations and location.
• Entity-specific taxation: C Corporations face double taxation (corporate profits and shareholder dividends), while S Corporations, LLCs, and partnerships often enjoy pass-through taxation, where income is reported on owners' tax returns, avoiding double taxation.
• Deductions and credits: Businesses can reduce taxable income through various deductions, such as operating expenses, employee salaries, and health benefits, as well as credits for activities like research and development.
• Compliance: Staying compliant involves filing the correct tax forms, paying estimated taxes, and meeting deadlines to avoid penalties and interest charges.

Understanding these aspects helps businesses:

• Manage their tax liabilities and corporate income taxes,
• Maximize tax benefits,
• And maintain good standing with tax authorities.

Incorporate your business with IncDecentral by Trademarkia

Incorporating your business with IncDecentral by Trademarkia provides a streamlined and efficient process to set up your company in as little as five minutes.

IncDecentral offers attorney-led business filing services that handle your paperwork, ensuring accurate and compliant filings in all 50 states.

With plans starting at just $49 + state fees, IncDecentral provides an affordable solution, making it easier for entrepreneurs to launch their businesses confidently.

For more details on incorporating your business, visit our website.