Most small businesses begin as sole proprietorships. That means that you, the owner, are the business, and the business is you - in the eyes of the law, at least.
There are a number of benefits to being a sole proprietorship, including the minimal legal expenses involved in forming one, no required corporate tax payments and the ability for the owner to easily transfer or sell the business if he or she so chooses.
However, there are some situations when a small-business owner might consider incorporating.
Why should I incorporate?
Fox Business pointed out that just the ability to follow your business's name with "Inc." offers a tad more credibility for your organization. Plus, in most states, other companies won't be able to form a new business with the same name as yours.
Incorporating has numerous tax benefits as well. First, it legally separates you from the company. While this might make tax season a little bit more complex, it also protects you, as a person, from any debts and obligations that your business has. Additionally, corporations can deduct some business expenses, like salaries for employees and new equipment purchases.
How do I incorporate?
When you're looking to incorporate, the first stop you should make is at the secretary of state or the office in your area in charge of registering corporations in your state. It typically makes the most sense to incorporate in the state in which you operate your business, Incorporate.com explained.
At the secretary of state's office, you'll obtain information about the fees and forms associated with incorporating. Many small-business owners hire an attorney to aid in the process to ensure they do everything by the books. Others go it alone, using their research skills and some software programs to guide them along, Entrepreneur explained.
Next, you'll need to create your articles of incorporation. You may write this from scratch, though some states provide a form for you (or your attorney) to fill out. In either case, you'll include:
- The proposed name of the corporation.
- The address of the main office of the corporation.
- The names and addresses of all the parties incorporating.
- The purpose for incorporating.
Then, you'll create the corporation's bylaws. These include:
- The roles and responsibilities of the shareholders, officers, and directors.
- When stockholder meetings will be held.
- Any other pertinent information about how the company will be run.
It's important to remember, though, that once you've incorporated, you must adhere to the bylaws as written. If you don't, there may be legal repercussions.
Incorporating is a big decision. While there are plenty of advantages, there are some drawbacks as well. Before making this move, you must think carefully about what you foresee the future of your business to be, and consider all the outcomes of incorporating.