One of the most important questions you need to answer as a small business owner is whether you should incorporate your business. What does “incorporated” mean? It’s the process of converting a sole proprietorship or general partnership into a separate entity in the eyes of the law (and the public). The distinction provided by an incorporated business shows your level of commitment and can really set you up for success.
Of course, incorporation isn’t right for everyone. The setup involves fees and plenty of hoop-jumping. More importantly, it introduces extra guardrails and responsibilities for your business in the future. But the benefits often outweigh these costs.
“The first thing you’ll need to consider before incorporating is whether structuring your business as a corporation is the best way to serve your vision for your company,” explains a business structure analysis from Forbes. “There are 4 major business structures available to you. Have you carefully considered the pros and cons of each? Corporate structure is attractive if you’re interested in issuing shares in your business, you are anticipating a rapid and far-reaching expansion of your enterprise, and/or your vision is best served by a rigid managerial hierarchy.”
It’s essential that you don’t rush this decision. Carefully assess your goals and priorities, then decide whether you want to incorporate or go with another structure such as a partnership or a limited partnership.
If you decide that incorporation is your best route, you’ll need to follow a strict process to make it happen. There is no universal checklist available, as the details vary from state to state. But here are some of the key steps that nearly all entrepreneurs will need to accomplish in order to become the proud owner of an incorporated business.
It’s essential to find a name that isn’t just memorable and effective but is available. Visit your state’s online database to make sure that your preferred name hasn’t already been taken.
This step is where you create the road map for how your business will handle its business. You often aren’t required to submit these documents to the state, but they’re essential when it comes to things like handling profits or navigating disputes.
You can pay an attorney to help with your governing documents, but the most cost-effective route is to use one of the free bylaw templates that you can find online.
Here’s where you let the state know what you want your business to be called, as well as contextual information such as the business’s purpose, directors, officers, and mailing address.
Most states allow you to file your articles of incorporation online. You can also print off hard copies and then submit them by mail, but this approach will always take longer. Once everything has been reviewed and approved, you’ll receive a confirmation from the state that your business is now its own legal entity.
Now that your articles of incorporation have been approved, you must hold a formal meeting. A top priority of this event is to record information on how your business was funded. This means the names of each person must be written down and the percentage of their ownership noted.
Be sure that you don’t conclude the meeting without also getting everyone to sign the business’s bylaws. If you have any resolutions to bring to the group, this is also the time to get them approved.
Even if your business has no employees, it likely needs an Employee Identification Number (EIN). You can learn more about EIN requirements and easily apply for your own by visiting this application page created by the IRS.
As mentioned earlier, your state may have some other unique requirements for incorporation. But once you’ve completed these 5 steps, you’ll be ready to start enjoying the benefits of incorporation.
It’s no walk in the park going through the incorporation process, but the rewards can be significant and long-lasting. Let’s look at some of the primary perks:
If someone were to come after your business, they would only be able to sue the business. Your personal assets would no longer be on the line.
There’s now a clear delineation between your personal finances and business finances. That separation also helps your business begin its own credit history rather than being attached to your personal credit history.
You’ll be able to issue shares of company stock to potential investors that you otherwise wouldn’t have access to as a sole proprietorship. Also, banks typically prefer to lend to an incorporated company over sole proprietors.
Say you did business with a company and they needed to give you a check. You look at that check and see that it’s from the CEO’s personal account and bears their personal information. How professional do you think that company is now? When you incorporate your business, you’re proving your credibility and professionalism as a business entity.
Taking the time to incorporate your business could help you immensely in the long run. Weigh your options and then take the necessary steps to become the type of business you want to be. It may take some time and effort to complete the process, but you’ll be glad you did.