Small Business Brief

Business Advice

Protecting Your Assets: When, Why, and How to Incorporate Your Business

At a certain point in running a business, you’ll want to know if becoming a corporation makes sense for you. 

There are more individually owned businesses than any type of corporate structure. Legally, is that the right way to go for you? Are you protecting yourself and your assets properly?

There are many advantages to becoming a corporation. Read on to learn what those advantages are and how to incorporate a business.

Advantages of Incorporating Your Business

Before you incorporate a business, you want to know if it makes sense for you. It doesn’t matter if you just started a business or if you’ve been in business for a while. It may make sense depending on your business situation.

You may have been in business for a while and find that you’re paying quite a bit in self-employment taxes as a sole proprietor at 15.3%. As another type of corporation, you may be able to pay less in corporate and income taxes.

If you’re looking for investment in your business, a corporate structure allows you to exchange shares in your company for investment.

You may be a sole proprietor, but you have a lot to protect yourself from. Over 75% of small business owners are concerned that they’ll be targeted for a lawsuit. As a sole proprietorship, you’re not protected by the “corporate veil,” which means that your personal assets could be lost in the event of a lawsuit.

That means that you could lose your home, your car, savings, or any other personal property in the event of a lawsuit.

As a single member LLC, however, only the LLC can be targeted for a lawsuit. In that case, your personal property is protected, while the LLC’s assets are at risk. It’s not a fun proposition no matter how you look at it. You can always build another business, but you can’t build another life.

You’ll want to have a look at this blog for the full rundown of advantages to incorporating your business. 

How to Incorporate a Business

There’s a lot to know when you’re figuring out how to incorporate a business. Let’s start with the types of corporations.

Types of Corporations

There are several types of company structures. There’s a sole proprietorship, which is you doing business as yourself and receiving an income. This is popular among freelancers, contractors, and those participating in the gig economy.

There’s also the LLC, which can be a single member or have multiple members or partners. This gives members similar protections as a corporation, but business income is taxed as a pass-through entity.

An S-Corp is used by small businesses because profits and losses are passed on to shareholders.

C-corps are typically used with large businesses that have a lot of investors and shareholders. It’s taxed as a business entity.

Get Outside Assistance Before Deciding

Before you make the leap to incorporating your business, get the help of a couple of advisors to determine if becoming a corporation makes sense for your business.

It would be a massive small business mistake if you were to only rely on the information you find online to make the decision. You may not have a budget to pay an attorney for their time, but it can cost you much more if you don’t get it right.

You’ll want to have a conversation with your accountant first to see if they have any insight. They’re not attorneys and they’ll tell you that upfront. They may be able to provide some guidance that you can take into consideration.

The next person to talk to would be a tax attorney to lay out your options and tell you the legal and tax implications of each one. They may also have business law expertise, and they can draft the articles of incorporation for your business.

If not, then hire a small business attorney who can help you draft the articles of incorporation and file the paperwork.

File the Paperwork

When you finalize which type of corporate structure you’ll use, you have to file the appropriate paperwork with your local secretary of state’s office.

The first thing you need to do is to make sure that the name of the business doesn’t already exist. Most states have a database where you can easily do a quick search.

Some states, like Pennsylvania, require that you have what’s called a registered agent for your corporation. This is an address for your business that will receive important legal notices on behalf of your business.

Some states allow you to act as your own registered agent while others require that you use an outside registered agent.

Your Legal Responsibilities

After you file your corporation papers, you’ll get a confirmation from the secretary of state’s office. It can take a few weeks for everything to be processed and finalized.

Once everything is confirmed, congratulations! You now are a corporation. You still have some work ahead of you, though.

You’ll want to get an EIN number for the corporation through the IRS. This is the number that you’ll use to file taxes, as opposed to using your social security number.

You have to open an official bank account for the corporation. Your bank will require the EIN number along with other documentation to show that you are incorporated.

Your obligations will vary by the type of corporation and state where you’re incorporated. You may have to have regular board meetings or renew your corporation status every couple of years.

Be sure that you understand all of your legal responsibilities before you form your corporation.

Start Forming a Corporation Now

Does the idea of incorporating your business make sense to you? If it does, then you’ll need to know which type of corporation works best for you.

As a sole proprietor, it may make sense to become an LLC to protect yourself. You may later decide that becoming an S-corp makes sense as your business grows.

No matter what you think, the smart move is to always consult with your accountant and legal team before deciding how to incorporate a business.

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