Incorporating simply means creating a new corporation under the laws of the specific state in which you incorporate. 3 min read
An S corporation (also referred to as an S corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation. Oct 29, 2019 The first step to incorporating your business is making sure your business’s name is available. Fortunately, all 50 states have online databases where you can find out if your proposed name is already in use.
1. What is Incorporation?2. Benefits of Incorporating a Business
3. Disadvantages of Incorporating a Business
Help I Need To Incorporate My Small Business Loan
4. Frequently Asked QuestionsWhat is Incorporation?
Incorporating simply means creating a new corporation under the laws of the specific state in which you incorporate. Incorporation can also refer to the formation of a Limited Liability Company (LLC).
Benefits of Incorporating a Business
There are several benefits to incorporating your business, which include the following:
- Incorporating allows you to protect your personal assets. The business’s debts and liabilities are kept separate and cannot affect the owner of an LLC.
- A business that is incorporated can file lawsuits and buy/sell property.
- Incorporation even means that the company can commit a crime, i.e. tax fraud or another type of business crime.
- Incorporating is simple. Simply file an application within the specific state where you wish to operate.
- Customers may prefer to purchase goods or services from a company operating with “Inc.” or “LLC.”
- All 50 states, including the District of Columbia, recognize both LLCs and corporations.
- A corporation can avoid double taxation of its profits and dividends by choosing Subchapter S tax status.
- Corporations can deduct normal business expenses before they apportion income to owners.
- Corporations can easily transfer ownership through a transfer of securities to the new owner.
- Corporations can operate for an unlimited period of time.
- Corporations can create tax benefits but C corporations might be exposed to double taxation of profits.
- Those businesses set up as S corporations can pass income to the shareholders.
- The IRS generally taxes corporations at a reduced tax rate than individuals.
- Corporations can issue shares of stock.
- A business that is incorporated can take its company public.
Disadvantages of Incorporating a Business
While there are several benefits to incorporating your business, there are a few disadvantages to keep in mind, which include:
- Corporations must have meetings on a yearly basis in which the owners must follow specific formalities of such meetings.
- Corporations are more costly than partnerships and sole proprietorships.
- Corporations require regular and ongoing filings with the state, including fees associated with these filings.
Frequently Asked Questions
- Why should I incorporate my business?
As previously mentioned, there are several benefits to incorporating your business. Most important is the fact that corporations offer protection of your assets. Corporations also allow their owners to separate their personal assets thus protecting them from personal liability over the corporation’s debts and liabilities.
If you are strictly looking to invest funds, then you’ll want to establish a C corporation. If you have fewer than 35 shareholders, you’ll want to establish an S corporation.
- Where should I incorporate?
The state where you choose to incorporate is entirely up to you and your business needs. It will be cheaper to incorporate in your home state. More specifically, if you incorporate in your home state, you are not required to pay franchise taxes or file yearly reports in more than one state. However, most business owners choose to incorporate in the state where they intend on operating the most. For those businesses operating in multiple states, you can incorporate in one state and then register in those additional states, meaning that you will then be required to register, file annual reports, and pay annual fees associated with each state’s requirements.
- How do I incorporate my business?
- Contact the state’s secretary of state that is responsible for registering corporations.
- If you choose to hire an attorney, you can. However, with a little guidance from various literature, you can do so on your own, which will save you money.
- Prepare the articles of incorporation, which could cost roughly $80-100 each.
- Choose a business name, but keep in mind other requirements when choosing a name, including not being able to use words associated with the federal government, i.e. Federal, Reserve, Bank, United States, etc.
- File a Statement of Information form (depending on the state).
- After registering with your respective state, you’ll need to register with the IRS and obtain an Employer Identification Number (EIN).
- A corporation will need to create bylaws that specify in detail how the corporation will be run.
- Choose a board of directors.
- Draft a shareholder’s agreement.
- Hold a meeting where you will go over all important decisions regarding the daily operations of the business, including a tax accounting method, appoint officers, incorporate and adopt the bylaws, issue shares of stock, as well as other key topics to be discussed during the meeting.
- Should your business be issuing shares of stock, you should not open your doors for business until you do so.
If you need additional help incorporating your business, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.
Whether you’re in your first year of business or you’ve been an independent contractor for decades, you may be thinking about the possibility of incorporation. There are certainly advantages to incorporating as a business, such as a potentially lower tax rate, reduced debt liability, and better access to business loans. However, incorporation also requires more work on your part when it comes to keeping detailed records and filing reports. Incorporation can be helpful, but it isn’t the right choice for every contractor.
What Is an Incorporated Business?
Help I Need To Incorporate My Small Business Organization
Before looking at the pros and cons of incorporation, you need to understand the differences between a sole proprietorship and a corporation.
A sole proprietorship is a business structure where you are the only person involved in the business. Essentially, you and your business are one and the same in the eyes of the Canada Revenue Agency. Your business income is taxed at the same rate as personal employment income. If you find yourself in debt, creditors have the ability to make claims on your personal assets, such as your home or your vehicle.
Incorporation turns your business into an independent entity that is legally separate from you. You become a shareholder of your corporation. Because your business is now separate from you, you have less personal liability if your business goes into debt. Additionally, your business income may be taxed at a lower corporate rate.
The Cost of Incorporating
The first, and often the largest hurdle to overcome when you choose to incorporate your business is the cost. Filing for incorporation carries a fee of $200 as of 2017. Consult an accountant to help set up your expense reporting and payroll systems. A tax lawyer can help you go over your books as you restructure your business.
The steps involved in incorporating, such as registering for a business number and adding additional shareholders, take time. Minecraft tower defensewatermelon gaming. Before filing for incorporation, take into account not only the upfront costs and the time costs that will be required.
Tax Breaks
One of the most attractive aspects of incorporation is the corporate tax rate. In Canada, most provinces and territories have a lower rate and a higher rate for provincial income tax. Incorporated small businesses are eligible to claim the small business tax deduction, which allows for business income claimed under the deduction to be taxed at the lower rate. Any non-business or non-deductible income is taxed at the higher rate. The difference between the two rates can be significant. For example, in British Columbia as of 2017, the lower rate is 2.5%, while the higher rate is 11%.
If you are a sole proprietor in Canada, all of your income — regardless of whether or not it was business income — is taxed at the higher rate. If you choose to incorporate, you could save a significant amount of money on taxes.
Incorporation also allows for the possibility of income splitting via dividends. For example, if you have a spouse or common-law partner who makes less money than you, you can name that person as a shareholder in your corporation and pay that person a portion of your fiscal income as a dividend. This reduces your net business income, potentially lowering your overall tax payment. There are restrictions on the practice of paying dividends, and this is only an option if your income is significantly higher than that of your spouse or partner.
Access to Funds
If, as an independent contractor, you hope to expand your business, incorporation can improve your ability to fund your small business. Unit 3: testing the republicmac's history quizlet. Imagine, for example, you’re a contracting massage therapist, working out of your own home or from a clinic location. Say you wish to expand by renting your own space, and potentially hiring two or three employees.
If you incorporate, you have can attract investors by offering bonds or shareholder certificates. You may also be able to borrow money at a lower rate than you would as an individual. Banks tend to see corporations as safer options for lending, so you may be able to borrow more. Numerous Canadian grants are available to small businesses — as a corporation, you would be eligible to apply for some of these.
If you remain a sole proprietorship, you are reliant on your own savings and income to fund your business. It may also be more difficult to borrow money from a bank, because your income as an individual is less reliable than someone who receives a salary.
Help I Need To Incorporate My Small Business Grants
Continued Existence
Once you incorporate your business as a separate legal entity, the business will continue to exist even after your death. In the case of the above massage clinic example, the business property and all related deeds, loans, and grants could transfer to your heir upon your death. That heir could then decide to dissolve the business and inherit the liquid assets, sell the business, or take over as the primary shareholder and potentially continue to make a profit.
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Help I Need To Incorporate My Small Business Loan
The main determining factors for whether you should incorporate your business are overall income and plans for expansion. If you’re an independent contractor with no plans to expand into a small business, sole proprietorship is likely to be the better option. If you wish to expand someday, or you’re making significant profits as a contractor, incorporation can be helpful.