Incorporating a business is one of the biggest steps a business owner can make. It makes you feel like you’re in the big league, but more importantly, it’s worthwhile for practical reasons. Incorporating creates stability and progress for your business and peace of mind for your employees, too.
If you’re wondering whether or not to take your LLC or sole proprietorship to the next level, go for it. You have to account for the bigger tax expenses and the time it takes to incorporate, but it’s in your best interest to start the process.
Keep reading for a closer look at why incorporating is so beneficial and how to incorporate a business.
Why It’s Worthwhile to Incorporate a Business
The day to day aspects of your business doesn’t change much when it becomes incorporated.
You still have a team to motivate and a company to grow. But, when you expand as an incorporated business, you have access to more opportunities for growth.
Here are the top 3 benefits of incorporating a business.
The Chance to Raise Investment Capital
Incorporating companies don’t have as much liability for shareholders as other forms of business do. As such, they’re more appealing to investors because people trust their funds will be better protected.
When you incorporate your business, you have more chances of earning capital.
You can do this through private investment or by going public (making shares available in the stock market). Either way, you’re growing capital, which allows you to do more product research, hire more employees, or open another location. Whatever your growth strategy looks like, more capital can help you accomplish all the goals you’ve set.
The Ability to Transfer Shares
Another benefit of being incorporated is how easy it is to transfer shares. Think about it: if you’re the only owner, or part-owner, of a business, it would take forever for someone to take the company off your hands. Not to mention, this transfer would leave the business vulnerable to a complete re-branding or new way of doing things.
When owners and investors of a corporation decide to bow out, though, the process is much simpler. All they have to do is sell their shares. This can be done within a couple of hours; shares can be bought entirely by one person or sold to multiple people.
Still, the point is a shareholder isn’t tied to the company when they no longer want to be involved. Even better, the company doesn’t go through a whirlwind of changes every time a piece of it is bought and sold.
The Promise of Outliving an Owner/Founder
The final reason to incorporate a business is to make it last. This isn’t to say your business will absolutely succeed if you incorporate it. But, you can trust your incorporated business will have a better chance of lasting if you die suddenly than if you were to leave it behind as an LLC or sole proprietorship.
Such kinds of businesses are dependent on the life of the owner(s). When the people who have rights to the business die, it’s hard to pass on the business in a fair, efficient manner.
Incorporated businesses, on the other hand, can continue indefinitely. It would still have adjustments to make should certain people leave the business or suffer an unexpected death.
But, these wouldn’t risk the wellbeing of the whole business.
How to Incorporate a Business
Once you realize the value of incorporating a business, it’s time to get to work.
Use the guide below to help you complete the process with ease.
1. Build Your Team
Incorporated businesses have two key things that set them apart from other companies: a board of directors and a group of shareholders. These go hand in hand with the benefits of incorporating mentioned above.
The members of the board of directors become the go-to people if you were suddenly unable to help run the business (i.e. because of death or serious illness). They help keep the business running smoothly.
Shareholders, on the other hand, provide the capital a business needs to grow. These are people who have stock in the company. It’s in their best interest for the business to succeed, so their wishes/opinions are often taken into account before big decisions are made by the board of directors.
In fact, shareholders usually have a say in board appointments. They help you create the initial board of directors when you file for incorporation, and they weigh in on new board members as positions open and fill.
2. Pick a Path
When you have your team of consultants ready, you’re able to decide the direction of your incorporated business. The first matter of business is whether you’re going to file as a C corporation or S corporation.
A C-corporation is taxable while an S-corporation is not.
Here’s what this really means:
- C corporations are individually taxable, and allow double taxation
- C corporations pay taxes at the corporate level
- S corporations do not pay corporate taxes – they file an informational return
- S corporations report their income/payouts on owners’ individual tax returns
There are pros and cons to each option. Typically, the C corporation structure works best for large businesses. It’s the best way for many shareholders to keep track of their personal funds when filing for taxes, but also to keep everyone on the same page.
S corporations work well for smaller businesses. They give business owners/shareholders relief from paying corporate-level taxes, which are often more expensive.
However, every shareholder has to claim the company’s taxes on their personal income tax every year. You need to be able to trust each person will do this fairly and accurately. After you have a certain number of shareholders, that’s hard to keep track of and a C corporation structure becomes the best option.
3. Hire a Lawyer
You may have some pushback between all the people on your board and all your shareholders about which corporation structure is best. This is just one of the reasons why you need a corporate lawyer.
Lawyers help keep emotions and personal interests out of company policies and procedures.
They show everyone how to think clearly and advise the best action for the business. Not to mention, they come in handy should your business run into serious trouble – like tax fraud or bankruptcy.
Hire your lawyer now so you’re protected if you run into such problems later. More importantly, keep them as involved as possible to help ensure you don’t find yourself in these kinds of situations.
4. Prepare All Your Documents
Once all the necessary filing decisions have been made, it’s time to gather your paperwork. This is the most meticulous part of the incorporating process. Your application has to be accurate from start to finish, and there can’t be any pieces missing.
To make sure you get everything right, contact the Secretary of State’s office in your area. The officials in this office have seen thousands of corporate applications and contracts before. They can help you fill out yours in a manner that’s efficient and stress-free.
If you want to do everything yourself, visit the Secretary of State’s website to access all the forms that need to be filled out. Necessary documents can range depending on the state you’re in and the kind of business you’d like to file. For instance, some industries have more in-depth qualifications to meet than others.
Don’t forget to pay your incorporation fee with the application. This helps speed things along once you’ve been approved to become an incorporated company.
5. Establish Bylaws and Operating Agreements
The final part of the process is to establish bylaws and operating agreements. The best way to do this is to hold a meeting with everyone on your board of directors, all your shareholders, and of course, your corporate lawyer.
If you’re incorporating your business in the United States but you’re already established elsewhere, you may want to have your designated registered agent present as well. There are all sorts of benefits available when you incorporate your business in multiple countries. If you’ve set your sights on a Central American country, for instance, here is what company incorporation Costa Rica will mean to you.
Your lawyer can help you find a trustworthy registered agent. This person accepts official U.S.
paperwork on your behalf when you’re out of the country.
The meeting between all your important personnel may take the whole day, or it could be just for an hour or so. It really depends on who’s in the room and how well everyone’s opinions match up. The bottom line, though, is to establish a clear set of expectations for the business and to form the proper operations to ensure things go as planned.
Discover Additional Business Insights
Figuring out how to incorporate a business is only the beginning of your growth. From there, you have to figure out how to keep the board and shareholders happy by creating income and keeping the business running smoothly.For tips and tricks to help you do this, click here.