Start your week with information and advice on starting your business! This column runs on Mondays every other week.
Incorporating a business is a must-do for entrepreneurs to protect personal assets, minimize taxation and more easily raise capital. Choosing the right business entity for your startup depends on what’s important to you — which in turn depends on the time and effort you can afford to put into management and corporate compliance, how you hope to get funded, and your preferred tax treatment.
Owning a small business carries risks, and having legal protection can make or break you when something goes wrong. So get incorporated now.
“All entity options have give and take,” says Matthew Kaufman, director of small business filings at online legal service provider Rocket Lawyer. “Taking a look at what your goal as a company is in the short and long term will help put you in a category.”
“For small businesses starting out there’s only one reasonable choice to make,” says Mike O’Malley, a Connecticut-based business mentor with SCORE, a small business counseling and mentorship non-profit. “Most businesses are best off starting out as an LLC because it gives you protection for your personal assets, creating a barrier between the company and assets such as your home and automobile.”
The most common legal structures for incorporating a business are:
Limited Liability Company (LLC) – A popular option for small businesses because it offers great benefits like liability protection and tax savings, with lots of management flexibility and easy maintenance. You can raise money through investors or lenders but you can’t sell stocks.
C Corporation – Shareholders are protected from direct tax liability but income is subject to double taxation, meaning the corporation is taxed on its income and shareholders are taxed again on income received from the corporation. Adherence to annual meetings and more demanding compliance rules is required. This is a good choice if you hope to take your business to the public market one day.
S Corporation – Incorporating a business this way reaches more of a middle ground, because the company isn’t taxed on its net income, while shareholders are taxed on income they receive from the corporation. You can raise funds by selling shares but there are limitations on how many people can buy those shares.
Incorporation requires an “articles of incorporation,” a form with the name, purpose and location of your company, names and addresses of people incorporating, and a primary contact for process and service notification. Remember to secure the domain name of your company before incorporating so your name and website match. All necessary forms can be found on your state’s official website. The process is fairly straightforward, if a little cumbersome, and can be completed in a day or up to eight weeks. Fees range from around $100 to over $400 depending on the state and whether or not you need expedited service.
O’Malley insists that most entrepreneurs are capable of handling the incorporation process themselves without needing to hire a lawyer who could charge precious startup capital north of $2,000. Still, turning to an online legal service provider such as Rocket Lawyer, LegalZoom or Nolo makes quick and easy work of your legal needs.
Using these services means you can apply in under half an hour, and then simply wait for the state to finish its processing. Certain levels and price points of membership provide you registered agent service – the address on file at which the state can send tax and legal notices – and access to a library of legal documents such as lease, non-disclosure and employee agreements. They also provide all ongoing compliance documents as you need them. Think of it as continued hand-holding to help keep your business in good standing.
“There’s a difference between incorporating your business and keeping it in good standing,” Kaufman adds. “If you form a company it’s like having a child; now you’ve got to raise it, nurture it and keep the business growing.”
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