Incorporating Your Small Business
If you are an aspiring entrepreneur and have a profitable business going, you must be aware of the advantages and disadvantages of incorporating a small business. Forming corporations are no big deal. If you are capable of running a successful business, you must be sufficiently equipped in incorporating a small business. All Sate business administrations have simplified incorporating procedures to the possible extent to help small business and actively solicit business registrations in their territory. Online resources with clear instructions for business organization are available in all states. You may consult a lawyer for drafting legal documents for forming corporation to avoid future complications.
The advantages in incorporating a small business are many. The foremost is the personal liability protection it offers. As business expands the associated risks also increases proportionately. By forming a corporation, you are creating a legal entity that has a separate existence in the eyes of Law. That entity is responsible for all its business operations and personal liability of the business owners (or share holders as they are called) is limited to their capital contribution. Your personal assets are safe from being drawn into the business. Limited Liability Companies also provide such personal liability protection. However, the business continuity and sale and purchase of business interest are moot. Generally LLC has no separate existence from that of its members unless expressly specified otherwise. Corporations are ‘perpetual’. It has a separate existence from its shareholders. Death or disability of a share holder does not affect its existence in normal course. Stocks or shares are relatively easily transferable. Due to this advantage, investors are willing to invest in corporations when compared to other business forms. So, it is easy to attract funds for expanding your business as a corporation.
There are two types of corporations. S Corp and C Corp. The basic structures of both are similar. There are certain limitations in forming an S Corp. The main difference is the tax classification. C Corporations are subject to corporate taxation. It has to file a business profit or loss return and directly pay tax on its profits if applicable. Then again when the profits are distributed among share holders, they have to declare that as income and pay tax on it. In a LLC or S Corp, the profits can pass through to the members or share holder in proportion to their stock holdings. The members or share holders can declare the same in their personal returns and pay tax. Basically C Corp profits are subject to double taxation.
Incorporate Yourself to Save Money but Beware of Mistakes
Incorporating a small business is no rocket science. If you are capable of operating a business, you are capable of incorporating yourself. Apply your mind and take care of the fine print and you are through. States actively encourage businesses to register and operate in their territory. For this, the state agency handling incorporations have simplified business registrations to the extent possible. All states have online resources that facilitate incorporations. Read their instructions carefully and act accordingly. No mystery there! You need not be a lawyer to read American (English) and understand the requirements. Any layman can do it.
As to why incorporate, you have to plan your future far ahead. Business continuity in any other business structure is moot. If you think yourself as an entrepreneur and wish to attain greatness in business incorporating yourself is the best bet. By incorporating yourself you plan for the future. The business structure of a corporation offers you business continuity and for this reason investors are willing to contribute funds to corporations. Stocks or shares in a corporation are easily transferable unless otherwise stipulated in the bylaws or articles of incorporation. Easy transferability converts into ease of attracting capital.
Beware of the mistakes that are commonly committed in small business incorporations. Usually this happens because you are in a hurry to start your business. A certificate of incorporation is not a license to do business. Other formalities and procedures are required in operating a business. You have to get all applicable licenses and permits for your business, a federal Employer Identification Number or EIN etc. The naming of your corporation is also important. You have to make sure that the name you select is not in use. Otherwise you may get sued under the Intellectual Property Laws and may end up paying damages.
Remember, you will need time to understand all the procedures and formalities and to comply with them. If you are engaged otherwise, weigh the pros and cons of spending time on incorporating yourself when compared to paying a lawyer for the work. It might turn out that paying a lawyer is far better than taking the effort yourself. The strain and hassle may well be not worth it. Lawyers experienced in incorporations can do the job within a fraction of the time you will have to spend on incorporating yourself. Moreover, you can avoid the stress from not knowing whether what you have done is right and any future complications due to a wrong act on your part while incorporating yourself.
