How to Incorporate Your Business
When You Want More
If you sell a product on your own without registering with the state, you’re a sole proprietor. If you and at least one other person team up to sell a product, then you’re involved in a partnership. However, both those options expose you to legal liability. If you want to limit your liability and obtain other benefits, you’ll need to incorporate your business. Below, we’ll take a look at exactly what it means to incorporate a business.
Why You Should Incorporate Your Business
To incorporate a business doesn’t necessarily mean start a corporation, although that’s one option. Instead, incorporating a business means filing paperwork with the state to officially form your business. It’s registering a specific type of business with the state.
If you’re a sole proprietor or part of a partnership, there’s no legal separation between you and your business. Forming an LLC or starting a corporation offers you some legal protection in case your business ends up on the wrong end of a lawsuit.
Incorporating can also come with tax benefits that you wouldn’t receive as a sole proprietor. And if you want to issue stock to shareholders, you’ll need a legally recognized corporation to do so.
Below, we’ll go through the basic steps to form your entity and thereby incorporate your business.
A registered agent is the person or business authorized to receive legal mail on your behalf. If you’re served with a lawsuit or get official mail from the state, those documents will go to your registered agent. Every state requires you to list a registered agent on your formation paperwork, so you’ll need to obtain one early in the process.
You can act as your own registered agent, but that may not be your best option. In general, registered agents must be in the office from about 9 to 5 Monday through Friday to accept legal mail. If your business requires you to spend most of the day out and about, hiring someone to act as your registered agent makes more sense. Being your own registered agent means you’ll also have to list your home address on the public record, so some people opt out for privacy reasons.
Whatever you choose, your registered agent must fulfill a few basic requirements. Your registered agent must:
- Be at least 18 years old.
- Have a physical address in the state where you’re doing business.
- Consent to being designated a registered agent. In some states, this means signing formation paperwork formally accepting the role.
First, choose whether you want to form a nonprofit or a for-profit business. If you to decide to form a business that’s for profit, there are two main entity types to pick from: an LLC or a corporation.
An LLC stands for limited liability company. They are owned by the members and can be run by either outside managers or by the members themselves. In an LLC, members have membership interests that entitle them to a specific percentage of the company. For instance, in a 3-person LLC, each member might own 33 percent of the company. By default, LLCs are taxed as pass-through entities, although they may also elect to be taxed as an S-corp or C-corp.
For comparison, a corporation has to elect a board of directors, who then elect corporate officers charged with running the business and carrying out the board’s decisions. A corporation has a more rigid structure than an LLC, as the corporation is also beholden to shareholders who own stock in the company. Shareholder stock is easier to transfer than membership interest. For taxes, a corporation is taxed as a C-corp by default, though it can elect to be taxed as an S-corp instead.
Learn more about LLCs vs corporations.
You need to name your business, but it can’t be a name that’s already in use. To avoid giving your business a name that’s been claimed, perform a free business name search first.
Your name must also comply with state laws about business names. You can’t suggest your business is something it’s not, like a governmental agency. You may also need to add an identifier to your business name, like “Limited” if you’re running an LLC or “Incorporated” if you’re running a corporation.
Once you’ve got a unique name that meets all the legal requirements, you can reserve your business name if you want. This option is best for people who aren’t quite yet to file formation paperwork yet.
The last and most important step is filing the actual paperwork to incorporate your business. The name of the paperwork will vary based on the type of entity you’re forming. In the majority of states, an LLC is formed by filing Articles of Organization, while an LLC is formed by filing Articles of Incorporation.
Each state has different requirements for its formation paperwork, so check with your state. In addition to your registered agent’s name and company name, you may also be asked to include your business and mailing address, business purpose, and duration.
You’ll also need to pay a filing fee to submit your formation paperwork. The filing fee amount also varies by state. For instance, Wyoming charges $100 for LLCs or corporations to file paperwork. But there are also states like Massachusetts where you’ll have to pay $500 or more.
After You Incorporate
Once you’ve filed your formation paperwork, the state will review it to make sure there are no errors or issues. Once they approve it, then your business is officially incorporated.
Getting your business formed is a significant step. But you’ll still need to take care of things like:
- Drafting internal records like an operating agreement for an LLC and corporate bylaws for a corporation.
- Filing a Beneficial Ownership Information (BOI) Report with the federal government.
- Filing required business reports with the state, including an annual report.
FAQs
Yes, you can form a single-person LLC and get the same legal protections as a multi-member LLC. In fact, single-member LLCs are one of the most common business types in the country.
You can submit the paperwork online in every state. Some states even require you to submit online, while other states let you submit by mail, fax, or in-person.
Yes, if you’re running a corporation, you’ll need to hold an organizational meeting. In most states, an organizational meeting is required by law. At the organizational meeting, you’ll need to do things like adopt bylaws, appoint officers, and issue stock.