You've got your business up and running, and you've thought of everything--from the marketing strategy down to the paper clip vendor.
But now it's time to step back and look at the big picture--what should be the legal structure of your business? This brings us to incorporation.
While the decision to incorporate may not have a big impact on the day-to-day operations of your business, the implications will become obvious when tax season arrives, when you apply for a loan, or if you are hit with a lawsuit.
What does it mean to incorporate?
When one incorporates, this means that the business is legally a separate entity from its owners, shielding them from any personal liability for business debts and obligations.
The limited liability for those involved in corporations is often considered the primary benefit of this legal structure. But this is not to say that protection is guaranteed in all cases; there are exceptions. For wrongs you personally commit, you could still be held liable.
Another aspect about incorporating is that the life of a corporation is not dependent on the lives of its members. So the corporation will continue to operate even if the owner or owners die or if they decide to sell their interests.
What is required?
While an attorney is not required to incorporate, it's always a good idea to seek advice from one who is well-versed in the area to make sure you haven't left any stone unturned.
You begin by filing articles of incorporation with the proper state authority. You must also complete, but not file, corporate bylaws, which state the rules that govern corporate life under state law.
Also when you incorporate, you issue stock certificates to record ownership interests, making sure that the issuance of shares complies with federal securities law and state requirements.
What are your choices?
Before deciding what kind of corporation would best suit your business's needs, it's always good to seek the advice of your attorney. Some of the more common types of corporations are general corporations, close corporations, S-corporations, and limited liability companies.
General corporations. These are the most common legal structure. This is a legal entity that is owned by an unlimited number of stockholders who are personally shielded from debts or obligations related to the business.
Close corporations. Close corporations have a small number of shareholders, ranging from 30 to 50, no ready market for the corporation's stock, and active participation by the majority of shareholders in the management of the corporation.
S corporations. This type of corporation provides the benefits of incorporation, but it eliminates "double taxation," which is when the profits of a corporation are taxed first as income to the corporation and then second as income to the shareholders when profits are distributed as dividends. An S corporation is limited to 75 or fewer shareholders.
Limited liability company (LLC). An LLC is a business entity formed upon filing articles of organization with the proper state authorities. LLCs generally provide limited liability to their members, and are taxed like a partnership, preventing double taxation.
The lure of Delaware
Delaware has long been touted as the state of choice for many companies that are looking to incorporate, including more than half of the Fortune 500 companies. Since it is not mandatory that you incorporate in the state where your business operates, you can weigh several factors to choose the right one for your business.
Besides being one of states with the lowest cost to incorporate (about $125), historically Delaware had the most liberal incorporation statutes, which gives the management team more flexibility in operating the company. Many states, however, have narrowed the gap in this regard and are now offering the same flexibility as Delaware.
But it's always a good idea to consult an attorney when deciding what state to use for incorporation. Even though there are many advantages to incorporating in Delaware, in some instances, if you primarily do business in a single state, local incorporation could be the best option for you.
Ways to incorporate
There are only a couple of options when it comes to the ways you can approach incorporation.
Lawyers. Traditionally, companies turn to their lawyers to handle the incorporation process. Although it's ideal to have a lawyer walk you through the procedure for incorporating, this could be a time-consuming job, which will run up your legal bill.
To minimize this cost while ensuring that you have proper legal advice, consider using a lawyer for the major points of incorporating only. The rest you could handle either on your own or through an online incorporating service.
Online services. There are growing number of online sources that will take you step by step through the incorporating process and take care of preparing filing the necessary paperwork. It's as simple as filling in an order form. Just be sure that you've done the research beforehand.
And even though you don't have to rely on an attorney every step of the way, at minimum consult with one on the major points of incorporating just to make sure you're on the right track.