If you are considering starting a business, you’re almost certainly going to face the decision of choosing what kind of business to form. Two of the most common options that new business owners are faced with are LLCs (Limited Liability Companies) and Corporations. To assist you with this decision below we’ve outlined one of these options, corporations.
What is a corporation?
A corporation is a legal entity that is separate from its owners (shareholders), directors, and officers. This means that the corporation can enter into contracts, own property, and take legal action in its own name. Shareholders own the corporation by holding shares of stock, but in general they are not personally liable for the corporation’s debts or legal obligations.
Benefits of incorporating
Entrepreneurs may choose to incorporate their businesses for several reasons, including:
- Limited liability: As we mentioned earlier, shareholders are not personally liable for the corporation’s debts or legal obligations. This means that if the corporation is sued or goes bankrupt, the shareholders’ personal assets (like their homes or cars) are generally protected.
- Credibility: Incorporating can make a business appear more legitimate and professional, which can be important when dealing with customers, suppliers, and investors.
- Tax advantages: Depending on the specific circumstances, corporations may be able to take advantage of certain tax deductions and credits that are not available to sole proprietors or partnerships.
- Easier access to capital: Corporations can issue stock to raise money, which can be an attractive option for businesses that need to raise a lot of capital quickly.
Steps to incorporate
Now that we’ve covered the benefits of incorporating, let’s take a closer look at the steps involved in the process. Keep in mind that the specific requirements may vary depending on your state or country, so be sure to check local requirements before getting started.
- Choose a name: Your corporation will need a unique name that is not already in use by another business in your state. You can check the availability of your desired name by searching your state’s business name database.
- File articles of incorporation: This is the legal document that establishes your corporation as a separate legal entity. You will need to include information such as your corporation’s name, address, purpose, and the names of its directors and officers. You will also need to pay a filing fee, which varies by state.
- Draft bylaws: Bylaws are the rules that govern how your corporation will operate. They typically cover topics such as how directors and officers are elected, how meetings are conducted, and how stock is issued.
- Hold an organizational meeting: This is where you will adopt your bylaws, elect directors and officers, and issue stock.
- Obtain necessary licenses and permits: Depending on your industry and location, you may need to obtain certain licenses or permits before you can begin operating your corporation.
- Obtain an Employer Identification Number (EIN): This is a unique nine-digit number assigned by the IRS that identifies your corporation for tax purposes. You can apply for an EIN online for free.
- Register for state and local taxes: Depending on your state and city, you may need to register for various taxes, such as sales tax or payroll tax.