What is Business Incorporation?
Business incorporation is a legal entity separate from you, the business owner. As a legal body, business incorporation can go for lawsuits, pay taxes, commit crimes, and purchase a property. Unlike sole proprietorship and partnership, business incorporation offers enormous benefits that save owners from liability for corporate obligations and debts.
You can start selling your services or products without much legal processing with a sole proprietorship. It requires no lawful processing or registration because it is a legal default. However, if you’re operating a partnership with different owners, this business structure also makes the business owner personally liable, just like a sole proprietorship. Incorporating your business offers better opportunities because it shields owners from personal liability.
Business incorporation offers security to business owners. Imagine losing your personal assets over a lawsuit because you failed to incorporate your business, sad, right? You can save yourself from such an ordeal by taking the simple steps to incorporate your business. You may be trying to avoid dealing with excessive paperwork and going through tedious processes. However, incorporating your business is easier than you think.
Here you will learn about business incorporation, its types, benefits and the easy steps to incorporating your business.
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Types of Business Incorporation
There are different significant ways you can make your business legal: an S-corp, C-corp, B-corp, nonprofit corporation and LLC. There are obvious differences between these two types of business incorporation, and you’re about to find out about that.
LLC (Limited Liability Company)
Like other types of business incorporation, a limited liability company protects your assets from losses and debts. It is a relatively low-cost process that allows you to record your company's financial results. With an LLC, you can enjoy more flexibility because it will enable you to create your choice's management structure. Incorporating your business as an LLC gives you access to lesser paperwork and helps you remain compliant with your local and state laws. Also, you can efficiently deal with business taxes as an LLC because it doesn’t have a federal tax classification. With LLC, you need not bother about annual meetings or keep records.
However, an LLC is mainly for small or medium-sized businesses that would instead operate without a formal structure. It also offers flexibility for profit distributions between owners. As a business owner, if you’ve decided not to go public or offer stocks, you can incorporate your business as an LLC.
An S-Corp also protects business owners from corporate liability, requiring businesses to have 100 shareholders. However, an S-corps must have a board of directors in the company’s management. It has a stricter structure than LLC because of the numerous formalities required for its business operations. These shareholders must conduct meetings, keep minutes and provide regulations relating to the issuance of stock shares.
In addition, S-corps improves the credibility of your business with investors, suppliers and creditors. Also, employees get paid dividends from the profits made under an S-corp. Choosing an S-corp will be more profitable if you’re planning to have multiple people in your company.
With a C-corp, there is no restriction on the number of shareholders that your business can have. Many big companies like Google, Apple and others use the C-Corp structure in their business. This type of business incorporation offers its owners the highest level of security against personal liability, but it costs more to operate. As a corporation, you must perform thorough record keeping, reporting and documentation of operational processes.
Also, a c-corp has an extra edge when raising funds by selling stock. This type of business also has benefits because it helps attract employees and great minds that can upscale the business. If you’re planning to go public with your company or eventually sell it, choosing a c-corp will serve you best.
A b-corp is also known as a benefit corporation. It is a for-profit corporation that the United States recognizes that is taxed in the same way as a c-corp. However, it differs from a c-corp in the area of purpose because it is driven by profit and mission. In a b-corp, the company's shareholders keep the company accountable to ensure it benefits the public and facilitates profit. Furthermore, there are states in the US that require that b-corps turn in their annual benefit reports as evidence for contributing to the public good.
This type of corporation receives tax-exempt status because of its beneficial role to the public. Regardless of the profits made by a nonprofit corporation, they don’t pay federal and state taxes. It is usually for charity, research, education, literature, religion etc. The rules that work with a nonprofit corporation are similar to c-corp. Also, a nonprofit organization adheres to strict regulations concerning the profits made, mainly because they cannot offer their profits to members.
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Why You Should Incorporate Your Business?
There are numerous benefits incorporating your business will afford you, and they include:
Protects Your Personal Assets
Starting a business is usually a thing of great joy; however, you need to be adequately informed. There are occasions when businesses fail or encounter great difficulty. It is only necessary that you protect your personal assets from such occurrences to avoid being stranded financially.
When you decide to incorporate your business as an LLC, an S-corp or C-corp, it protects your personal assets from creditors. Assets such as your car, home and property will no longer be linked with your business. That way, your assets would remain off-limits if anything happens to your business. Also, if you ever file for bankruptcy, business incorporation will shield you from having to pay off the debts using your personal assets. Instead, creditors will liquidate your business to take care of the loan.
Shields Your Personal Assets From Lawsuits
Business incorporation is necessary when accidents or unforeseen occurrences in your business involve a customer filing a lawsuit. By incorporating your business, there's an apparent barricade between your assets and the case against your company. It saves you from being personally liable for the possible damages.
It Offers Tax Benefits
It is wise for you to leverage the tax benefits that accompany incorporating your business. It can offer you the liberty to spread your losses. Also, it allows the deduction of employee benefits and operational expenses in many cases. The taxing authorities within your area can offer you incentives quicker when you're operating as a corporation rather than a sole proprietorship. However, there are certain technicalities surrounding tax laws that you might need an expert accountant to handle.
A business corporation allows your business to operate even when the business owner dies or leaves the company. It offers your business protection forever because it is a separate entity. By incorporating your business, you subscribe to a structure that allows you to keep your business operational and profitable regardless of what happens to those who start the business.
Incorporating your business allows you to form a long-term plan for your business. You can create a growth structure that will outlast and transcend you. Also, it eliminates the need for businesses to recreate themselves repeatedly. Running an incorporated business allows you to build a solid plan for your business that facilitates growth.
Easy Ownership Transfer
When you incorporate your business, you give it a separate identity from yourself as an individual. In case of an illness or challenge, the business owner can easily transfer their rights to the next of kin without any hassles. The ownership interest only needs to be moved because a share of stock represents it.
With the stock certificate, shareholders can sign their shares to someone else. However, the transfer process is usually tedious in a sole proprietorship or partnership because it requires a new deed, retitling of property and other administrative moves. By incorporating your business, you can save yourself from going through such a long process.
Easier to Raise Capital
Are you running a startup? If so, there's a high tendency for you to seek investors who can help you raise capital. As a corporate entity, you enjoy limited liability and the ability to transfer shares easily. It allows you to share stocks with investors willing to become shareholders in your business. In a case where you are holding more extensive offerings, stock exchanges and brokerage firms are summoned.
Incorporating your business gives it credibility among investors because it offers them a sense of legitimacy about your business. As a corporate entity, you must go through processes that help you build business credit, thus positioning you better to raise capital.
Business incorporation protects the image of your business that prevents it from being used undesirably without your full consent. The look, feel and nature of products you produce can retain their natural state better when you incorporate your business. As a corporate body, your business name, trademark, brand recognition and others maintain their distinguishing feature from other companies.
Better Record Keeping
The U.S government requires more documentation with a business corporation compared to other business structures. You will have to show your records annually, which would require you to learn detailed bookkeeping that captures the crucial details of your business. Alongside, this record-keeping helps you track the progress of your business and determine the best measures to improve output.
In addition, your detailed company records can assist you in getting a loan. Such records will give your lender an inclination into your expenses and profits and offer insightful suggestions that can transform your business finances. Also, a corporation provides owners and managers with an accurate body of legal precedent. As long as you can handle periodic filings, you enjoy the full benefits of business incorporation.
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How to Incorporate Your Business?
There's nothing to be weary or overwhelmed about when incorporating your business. Once you follow these steps, you will successfully incorporate your business.
The first step to creating a successful business is choosing a business name. You must select a name that has never been used to represent your business. Depending on the state you choose, they will perform a corporation search service that's in charge of checking if a name is available for use. While you're at it, you can begin to look out for available domain names to help your business gain a credible online presence.
You can use an effective tool like GoDaddy to check if a particular web hosting is available or not. Another factor to consider is the logo design or trademark that will communicate your brand identity. You must settle for a unique, original design representing the brand's image.
Choosing a location for your business is an essential factor that can determine the success of your business. Also, you need an available address where your customers can find you whenever they require your services. Every state has specific business laws, so you must follow the appropriate regulations to avoid getting a space in a restricted area.
You can explore low-budget options that will cost less, like shared workspaces or virtual offices. Subletting an office space is also an option you can explore for your business. However, if your company has many employees, you should search for a commercial workspace that will accommodate them conveniently.
There are two classifications of corporate entities that you can decide to use, either LLCs or Corporations. Before you choose a legal business structure, there are certain factors you must carefully consider. First, you must consider where you want to take your company, the goals you're willing to achieve and ensure it allows for growth.
Also, determine the level of complexity you're willing to put up with as a business owner. An LLC has less paperwork and complexity than a corporation; however, it is best to choose corporations if you deal with many people. Their reporting requirements also differ based on the federal and state governments.
Another factor you must consider when choosing a legal business structure is taxes. Profits made from taxes are personal income taxed at the end of the year. You must avoid double taxation as a corporate entity where you pay personal taxes and tax for your business. Other factors include the capital investment you require, licenses and regulations, and the level of control your board of directors will have in your business.
Registering your business with the government requires you to open a bank account, file a tax return, and apply for a business licence. Without a federal employer identification number (FEIN), you wouldn't be able to access a wide range of services. This nine-digit number works like a social security number that helps the IRS keep track of business entities' taxes and their various financial activities. Before setting up a retirement or health account, you need a federal employer identification number (FEIN).
A FEIN is necessary for you as a corporation if you want to expand your business and employ individuals to work in your company. When filing for taxes, you must have a FEIN for local, state and federal taxes. With your employees, you can get payroll reports that contain your FEIN, which is a payroll processing company file.
Before you can get a FEIN, you must determine if you're eligible for one and get the necessary information for the IRS. You can also decide to apply for a FEIN online through phone, mail or on the IRS website, depending on what works best for you. When you're done applying for the number, it will take two weeks for your number in the IRS system.
Without the right business insurance policy, your business is a timebomb ready to explode. If you love to safeguard your business from unexpected situations, you should find the right insurance policy to use. You never make the mistake of being distracted with matters such as staffing, cash flow and growth that you would forget to insure your company. Merely creating an LLC will not save you during lawsuits; however, an insurance policy will protect you from intellectual property law violations.
Types of Business Insurance
Although various insurance policies are available, you need to identify the one that works best for your business. The plans include:
- Business Liability Insurance: This type of insurance works best for small or medium-sized businesses. When you’re sued, business liability insurance can better protect your personal assets. Relying only on an LLC will not provide adequate protection in such cases.
- Business Income Insurance: A business income insurance policy safeguards your company when it loses income when physical property makes the output decrease. However, it doesn't cover weather damage.
- Commercial Property Insurance: If you're running a business with many physical assets, the best option for you is commercial property insurance. However, this type of insurance varies in terms of the assets you're dealing with. Make sure you do an inventory of your property before you choose an insurance policy.
- Business Owner's Policy: A BOP combines property and general liability insurance, which business owners usually purchase for a space they own. This insurance policy will work best for you if you attend to clients from home or work from your home office.
- Contractors Professional Liability Insurance: Probably you're running a business that deals with construction or building; this policy can help you cover mistakes that can arise in a lawsuit. There are usually liability claims against those in engineering, subcontracting and architecture for environmental impact.
- Cyberinsurance: If your company's data is breached and bad actors can access your customer's sensitive information, cyber insurance will come to the rescue. If your business deals with information like social security numbers, credit card numbers, or HIPAA-protected records, you must have this type of insurance to cover the costs.
- General Liability Insurance protects your company against personal injuries, property damage or advertising injuries. However, general liability insurance fails to cover the aspects that cyberinsurance accounts for.
You can also seek professional advice from a lawyer and accountant to determine the best policy for your business. Another way you can speed up your process of choosing is by having a mentor or peer within your industry who can also make you better informed.
Incorporating your business places you in a better position to receive funding to grow your business. You can decide to apply for business grants, business loans or even gain financing from venture capitalists. The incorporation process will help you seem credible to investors, making them believe in your business and invest in it. Make sure you research thoroughly to ensure your business is eligible for funding.
Once you’re done with incorporating your business fully, the next step is to advertise your business. An effective way to go around it is to create a marketing plan that covers an analysis of your target audience, the places they hang out and the methods to reach them. You need a marketing plan to differentiate your business from others in the industry. After studying your audience and the best ways to solve their problems, you must create brand awareness across various platforms. Make sure to identify your competitors and their strengths to edge over them. While at this, you must be conscious of your marketing budget to create a realistic plan.
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In A Nutshell
As a founder, you have to incorporate your business quickly to gain protection against personal liability. Also, you deserve to work with a flexible business structure that allows you to transfer shares without needing the approval of other shareholders. If you’re intentional about gaining funding for your business, you would have to incorporate your business because angel investors and venture capitalists are interested in separate legal entities. With business incorporation, you can invest heavily in intellectual property with your corporation that owns its own IP.
What are you waiting for? Incorporate your small business today!
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