The Basics of Incorporating
Q: I have a great business idea. What do I have to do to register my company with the state and become an official company-before someone comes up with the same idea I have? Also, what kinds of costs are involved?
A: In every state, those wishing to form a corporation or a limited liability company must file a document with a state official, usually the secretary of state. This document is typically called the "articles of incorporation" or the "certificate of incorporation." You must also pay a filing fee with your documents. After the appropriate state agency approves and files those documents, the corporation or LLC comes into existence.
The fees to file articles of incorporation range from about $75 to $500, depending on the state and how you file the articles. If you prepare the articles yourself, all you'll be required to pay is the state fee. You can also have the articles prepared by an attorney, in which case the cost for preparation would depend on the attorney's hourly fee. You may also choose to use an incorporation service company to prepare and file the documents with the state. The company I work for, Business Filings Inc., is such a company.
You aren't required to form a business entity such as a corporation or LLC. If there will be only one "owner" of the business, it may be feasible to set the business up as a sole proprietorship. In a sole proprietorship, the owner of the business carries on the business as an individual. This means that he or she is directly liable for all the debts of the proprietorship and reports the gains and losses from the proprietorship directly on his or her own personal income tax return. No state filing is required to form a sole proprietorship.
The primary advantage of incorporation is the limited liability protection the corporate entity affords its shareholders (owners). Typically, shareholders aren't liable for the debts and obligations of the corporation; thus, creditors won't come knocking at the door of a shareholder to collect the debts of the corporation. In a partnership or sole proprietorship, the owner's personal assets may be used to pay the debts of the business.
Rick Oster is co-founder and vice president of Business Filings Inc., an online incorporation service provider that helps small-business owners and entrepreneurs form corporations, LLCs and nonprofits in any state.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.