When running your own business, it’s so easy to get lost in the jargon, trying to get your head around the complexities of running a company successfully while also ticking all the boxes behind the scenes.
So it’s no surprise that the question of whether or not you should incorporate your business probably makes your head spin.
But that’s why we decided to write this article, to help stop the spinning.
Here, we will break down the jargon and rules surrounding the incorporation process, making it much simpler to follow so that you can make the right decision for your business and get back to what you do best–serving your customers!
Key Takeaways:
- Incorporating your business protects you from personal liability and secures your intellectual property.
- You should incorporate your business if you’re trying to raise funds or secure business contracts.
- The process of incorporating your business differs depending on where your business is based.
Is It Incorporation Time?
In most instances–much like investing–the earlier, the better when incorporating your business. Many benefits come from incorporating your business into your business, including personal protection and securing the future of your brand.
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Protect yourself
One significant benefit of incorporating your business is the protection it offers you.
Consider the incorporation process as sun cream and activity with other companies as the hot, blazing sunshine.
The more sunshine you expose yourself to, the more sun cream you need to apply, and the same can be said for your business relationships. The more companies you engage with, whether it be through selling products, bringing on staff, or signing work contracts, the more potential there is for losses.
As a sole trader, those losses can directly impact you and leave you at risk of losing personal assets, such as your car or even your home.
However, by incorporating your business, you shield against losses, ensuring that it is the business that is accountable and not you as the founder.
Protect your intellectual property
Another benefit of becoming an incorporated business is the protection of your intellectual property (IP). Without proper IP protection, you run the risk of former partners suing for their contributions to the business in the early days (Eduardo Saverin, anyone?).
Incorporating the company and assigning the IP to it ensures there are no issues if founders leave the business.
It’s time to fundraise
Let’s get those dollars rolling in! For many, investment is crucial to scale their business, and many investors will only look at legally formed companies.
So to make sure you secure those lucrative Benjamins for your brand, you’ll need to incorporate your business to attract the right investors.
Incorporating Your Business: A Step-By-Step Guide
1. Choose a business name: Select a unique name that complies with regional requirements. In the United States, you can check the availability of the name through the Secretary of State’s office.
2. Determine the business structure: Decide on the appropriate legal structure, such as a corporation (C-Corp or S-Corp), limited liability company (LLC), or partnership. Research the advantages and disadvantages of each structure and choose the one that suits your needs.
3. Select a state of incorporation: Choose the state where you want to incorporate your business. Consider factors like taxation, legal requirements, and the cost of incorporating in each state.
4. File articles of incorporation: Prepare the required documents, typically called Articles of Incorporation. Include information such as the company name, purpose, registered agent, directors, and the number of authorized shares.
5. Appoint directors and officers: Determine the initial board of directors and officers who will manage the company. Ensure compliance with any state-specific requirements regarding director qualifications.
6. Obtain an Employer Identification Number (EIN): Apply for an EIN from the Internal Revenue Service (IRS). This unique number is necessary for tax purposes, hiring employees, and opening a bank account.
7. Fulfill state and local requirements: Research and meet any additional requirements imposed by the state or local authorities. This may include registering for state taxes, obtaining permits or licenses, and complying with zoning regulations.
8. Create corporate bylaws or an operating agreement: Draft internal governing documents, such as corporate bylaws for corporations or an operating agreement for LLCs. Define the company’s operating procedures, roles, and responsibilities of shareholders/members.
9. Hold an organizational meeting: Conduct an initial meeting with the board of directors or members to adopt bylaws/operating agreements, elect officers, and address other organizational matters.
10. Maintain ongoing compliance: Fulfill ongoing compliance requirements, such as filing annual reports, holding regular meetings, and maintaining proper records. Stay updated on federal, state, and local laws that may affect your business operations.
Pro Tip: Incorporating your business differs from state to state and country to country. It’s always important to check the process in your area before getting started.
Frequently Asked Questions About Incorporating a Business
What does incorporating your business mean?
Incorporating your business refers to the legal process of establishing a separate legal entity that provides limited liability protection and distinct legal and tax advantages for business owners.
What's the difference between LLC and incorporated?
The main difference between an LLC and being incorporated is the legal structure, with an LLC offering flexibility and pass-through taxation, while incorporation generally refers to forming a corporation with more formalities and potential for issuing shares of stock.
Why would a business incorporate?
A business may choose to incorporate to separate personal and business liabilities, gain access to funding options, enhance credibility, and enjoy certain tax advantages.
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