Incorporating your small business is among the most important steps in starting a new business, and is critical in order to run your company without the potential risk of being held personally responsible for the debts and legal liabilities of the business.
Small business incorporation has become relatively simple with most states making it easy for small businesses to incorporate.
Incorporating can be performed with the assistance of an attorney, but it is also quite simple to do by yourself using one of many online providers.
Incorporating a small business essentially means going through a process of filing specific paperwork with the state.
and sometimes the federal government, that sets up the business to become its own legal entity - as if it were a living and breathing individual.
It also causes the business to become a separate taxable entity - separate from its owners.
Some of the more common types of corporations include traditional entities such as "C Corporations" and "S Corporations", as well as some of the increasingly more popular forms such as Limited Liability Corporations (LLCs) and Limited Liability Partnerships (LLPs).
The specific requirements for incorporating into each of these types will vary somewhat from state to state, based on the regulations in place in the state where the headquarters office will be located.
One of the most important reasons for incorporating a small business is to minimize personal legal responsibility of the individuals who own the corporation.
Incorporating the business as a unique and separate entity helps shield the owners from the financial obligations and legal responsibilities which may come up in the ordinary operations of the business.
Limited Liability Companies (LLCs) are one of the more popular types of corporations that provide liability protection to the owners who are called "members".
The LLC is a preferred alternative among business owners starting a new business because of this protection from personal liability as well as several other advantages.
The LLC is somewhat of a cross between a partnership and a traditional "C Corporation".
It is not difficult to set up, and it can have an unlimited number of members.
While the LLC may not necessarily be the right entity alternative in every situation, it has advantages over an S Corporation in that the LLC is simple and easy to create and much less complicated to manage.
Limited liability company (LLC) laws and regulations differ among states.
When creating an LLC or other type of corporate entity, you should check with the state agency dealing with incorporations and businesses.
Typically, business incorporations are managed by the Secretary of State's office.
Most all state agencies have detailed information concerning incorporation or LLC creation available online as well as personal assistance via telephone or even in person.
With proper planning, a correctly structured entity also provides the company owner(s) a number of individual tax advantages.
Members of an LLC can make the decision to be taxed the same as an S Corporation which allows any profits of the business to pass through as if it was personal income.
Any business profits would be "passed through" to each of the owners based on their percentage of ownership.
Each individual owner would then report his portion of business profits or losses on his personal income tax returns.
Under this scenario, small business owners are also able to use any business losses to offset profits from other sources.
This strategy also helps to avoid the double taxation that is inherent with the operation of a C Corporation.
Of course, this is certainly a topic and strategy that you should explore with your accountant!