Once You've Decided to Incorporate

Once you've decided to incorporate your business you have to decide which type of corporation to form and where to incorporate. Here are some of the factors to consider.

Once you've decided to incorporate your business, you have more decisions to make. You have to decide which type of corporation to form and where to incorporate. You're entitled to incorporate in any state in the U.S., rather than just the state in which you live and work. There might be good reason for this; another state might offer better tax treatment or more flexible incorporation laws. However, if you do incorporate in another state, you'll have to register as a foreign corporation in your home state.

If you're planning a for-profit venture, the choices are C or S corporation or Limited Liability Company LLC. The main difference between a C and S corporation is the way profits are taxed. The basic set-up procedures are the same, except that an S corporation requires the further step of an additional IRS filing. Your state may impose additional filing requirements as well.

S corporations are often recommended for start-ups and small businesses because profits (and losses) "pass through" to the shareholders to be claimed on individual tax returns. C corporations pay corporate income taxes directly to the government. There are a few other differences, mainly regarding corporate stock allocation and the potential number of shareholders.

LLC laws vary by state. You are required to file corporate articles and pay filing fees as with conventional incorporation. You also have to file an "operating agreement," which is like a partnership agreement and takes the place of corporate bylaws. "LLC" (limited liability company) must also appear as part of the company name. And you'll need to elect whether to have "pass-through" taxation (like an S corporation) or be taxed at the corporate level.

Regardless of what type of corporation you decide on, you have to file either articles or a certificate of incorporation (with the commissioner of corporations or secretary of state) and then pay a fee. It's a good idea to consult an experienced attorney during this process to ensure that you're aware of your options and the legal and tax consequences of any decisions you make. Generally, filing for incorporation requires that you make the following decisions and provide the appropriate government entity with the information:

• Pick the name of the corporation. (Read Reserving a Corporate Name for details on this process.)
  
  
• Provide the names and addresses of the incorporators.
  
  
• Issue stock/determine shareholders.
  
  
• Appoint directors and officers.
  
  
• Decide the initial capital investment.
  
  
• Make the necessary tax filings.
  
  
• Set up a corporate record book.
  
  
• Adopt board resolutions regarding corporate organization.
  
  
• Establish a corporate bank account.
  
  
• Provide the name of a representative for formal service of legal documents.

After the corporation is formally established, it must remain financially and legally separate from any of its shareholders in order to preserve the benefits and protections of corporate legal status. Maintain healthy business procedures like keeping specific records and accounts, filing necessary government documents and holding regular shareholder meetings or getting written consents or waivers by directors and shareholders.

As mentioned earlier, you don't have to incorporate in the state in which you live or establish your business. Picking the State of Incorporation for Your Small Business explains some of the considerations in this decision.

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