A legal business structure is imperative in operating a business in any of the states. Some forms of business do not involve many legal or statutory formalities in formation and its operations. Sole Proprietorships and General Partnerships can be formed by simple intent of the principal(s). However you will need to obtain all the obligatory permits and licences to operate the business. Forming a Limited Liability Company or a Corporation entails formal procedures. The organisation of LLC or the incorporation of a corporation is governed by state statute. These rules and regulations vary in each state. For forming a LLC you have to select a name and file an Articles of Organization with the state agency handling business registrations and pay a filing fee. Some states have a few more requirements for forming LLC such as filing an LLC Operating Agreement and publication of the intent to form LLC.

Forming a corporation involves lengthier procedures than forming a LLC. A corporation has a separate legal entity from that of its business owners, formally termed as share holders. The corporation is constituted by units of stocks or shares which each share holder subscribes to and promise to pay for. The basic charter for operating business as a corporation is its Articles of Incorporation. The promoters or incorporators have to provide all critical information on the purpose of formation and the organizational structure as required by the state. There are two types of corporations, C Corp and S Corp.

Taxation formalities in each of the business form vary. The sole proprietorship is considered as having no individual existence or a ‘disregarded entity’ and the business owner files business tax returns along with personal returns. Partnerships have a similar system where the profits or loss from business is declared proportionately through partner’s personal tax filing. Partnership has to file an information return separately. LLCs or S Corps has a pass through taxation system as that of a partnership. Corporations are taxed directly and have to file separate tax and information returns.

Business owner’s personal liability to business debts can be limited by forming a Corporation or a Limited Liability Company. State laws have to be complied with for forming both forms of business.  There are a few formalities required for the formation. Limited Liability Company can be formed by filing an Articles of Organization with the state department managing business registrations and paying a fee. Limited Liability Company offers personal limited liability protection and flexibility in managing the business operations as in partnership or sole proprietorship. LLC can be constituted with a single member or multiple members. Another advantage with LLC is that it can elect to be taxed as any of the other IRS tax classification that is more beneficial in tax planning.

Forming Corporations entail extensive procedures. As any business entity, Corporations are also formed under state statutes. Procedures and formalities in incorporating your business may vary in each state. Corporations offer the limited liability protection to its share holders. This is the most adopted form of business due to its perpetuity and strict regulations controlling its operations. Lay investors prefer corporations above other forms because buying and selling shares in a corporation is easy. If you have plans for your business to expand beyond the status of a small business, corporations are your best bet. Why incorporate is because of these qualities of corporations. It is easy to attract capital and business continuity is not dependent on its business owners. Corporations can be of two types. S Corporations and C Corporations. Though the legal structures of both are same, there are some restrictions in S Corp business ownership. The taxation differs, S Corps have a pass-through taxation whereas the C Corp is subject to corporate taxation.

Limited Liability Companies and Corporations offer personal liability protection to its business owners. The disadvantage in these business forms is that the formation and maintenance entails compliance with state laws. The business owners have to pay yearly taxes for operating these entities and are required to file various returns to Federal and State governments. As the state statutes govern the formation and operations of LLC and Corporation and the rules vary in each state, you have to refer to the respective state statute on how to form a corporation or LLC.

Changing your business form from a sole proprietorship to a Corporation offers many advantages. The foremost as to why incorporate is the limited liability protection it offers. A corporation is a separate legal entity in the eyes of law and the corporation’s business deals do not affect its shareholders or officers personally with some exceptions. Incorporation is governed by state rules and regulations like that of all other business entities. Incorporation rules may vary in each state. To start a corporation in any state the basic requirement is to file Articles of Incorporation with the state.  Each state has its own stipulations as to the information to be stated in the Articles (or Certificate as called in some states). The name of the corporation, main purpose for which the corporation is formed, the authorized share capital and class of shares, voting rights and preferences of each class of shares, names and address of the incorporators and directors, the registered address which must be a local address, a registered agent or officer for process service with a local address and the person’s consent to act as agent etc. are some of the critical information required by states to be stated in the Articles. Filing an article and obtaining a certificate of incorporation does not authorize the corporation to start business. All the business permits and licenses required by Federal and State laws have to be obtained.

You can find hundreds of business articles on the topic of incorporating and setting up LLC s. You should actually take the time to read them and educate yourself on these subjects because this decision shouldn’t be taken lightly. It may seem intimidating at first to file the correct business forms but it doesn’t take too much time or that much money to properly form an entity that will save you in taxes and protect you from liability.

Incorporating your business gives you tax advantages and liability protection in the event that you get sued as a result of your business activities. Incorporating does take a lot of work to maintain but corporations definitely have their place in business. Annual records need to be maintained, meeting minutes, filing fees, officer lists, record books, etc. all need to be managed. There are plenty of service providers that can create your original business articles of incorporation as well as maintain your records so that you don’t lose the protection and benefits that a corporation affords.

Setting up LLC s is also a great way to get tax savings as well as liability protection. I personally prefer limited liability companies because I like to get creative with my business structuring and have one entity own another that owns another and so on. An LLC is able to own another LLC so it makes structuring multiple businesses easier. There are some ownership restrictions with corporations that aren’t applicable to LLC’s.

Filing out the proper business forms to file an LLC is actually not that difficult. You can find templates online or just call the secretary of state where your business operates and ask them for some direction. It’s really easy to switch from a sole proprietorship to an LLC or corporation and the benefits definitely out way the costs.