Many entrepreneurs incorporate their businesses each year to gain legal and financial benefits. The process may seem complicated for those unfamiliar with the requirements. Key steps include choosing a business structure, registering with the state, getting licenses and following tax rules. While some entrepreneurs choose to handle incorporation themselves, working with a financial advisor or a legal expert can help you meet business requirements and set you up for success.
How to Incorporate a Business
Incorporating a business creates a legal entity that exists separately from its owners. This separation protects owners’ personal assets from business liabilities. For example, if the business takes out a loan and doesn’t pay it back, creditors normally won’t be able to require owners to repay it from their personal assets. It may also save on taxes and boost credibility with customers, investors and financial institutions.
Details of the process of incorporation vary by state, but it generally follows these 10 steps.
1. Choose a Business Structure
The first step in incorporation is deciding on the appropriate business structure. Each type has specific benefits and tax implications:
- C corporation (C-corp): A separate legal entity that provides strong liability protection but requires corporate tax filings. This, however, means facing double taxation, as profits are taxed at the corporate level and again as dividends to shareholders.
- S corporation (S-corp): Similar to a C-corp, but you can avoid double taxation by allowing profits and losses to pass through to shareholders’ personal tax returns. The S corporation itself pays no federal income taxes, although profits may be taxed at the state level. It has restrictions on ownership, including a 100-shareholder limit.
- Limited liability company (LLC): A hybrid between a corporation and a sole proprietorship, offering liability protection while allowing pass-through taxation. LLCs are distinguished by having fewer compliance requirements than corporations.
2. Select a Business Name
Selecting a business name is one of the first steps in incorporation and is essential for branding and legal purposes. This step requires some consideration. The chosen name must:
- Comply with state naming requirements, which often prohibit certain words or require specific designations (e.g., “Inc.” or “LLC”)
- Be distinguishable from other registered businesses in the state
- Be available as a domain name if the business will have an online presence
Most states allow entrepreneurs to check name availability through the Secretary of State’s website. If the chosen name is available, it may be possible to reserve it for a limited period before incorporation is finalized.
3. Appoint a Registered Agent
Every incorporated business has to have a registered agent. This individual or entity receives legal documents, government correspondence and compliance notices on behalf of the business. The agent must:
- Be a resident of the state where the business is incorporated or a company authorized to operate in that state
- Have a physical address (P.O. boxes are not allowed)
- Be available during regular business hours
Business owners can serve as their own registered agent, but many opt for third-party services to maintain privacy and ensure compliance with legal obligations.
4. File Articles of Incorporation
Articles of incorporation (also called a certificate of incorporation in some states) is the official document that registers a business with the state. This document typically includes:
- Business name and address
- Purpose of the corporation
- Information about the registered agent
- Details about stock shares (for corporations)
- Names and addresses of incorporators
The filing fee varies by state, typically ranging from $50 to $500. Once approved, the business is officially incorporated and recognized as a legal entity.
5. Obtain an Employer Identification Number (EIN)
An employer identification number (EIN) is issued by the IRS and functions like a Social Security number for the business. It is required for:
- Hiring employees
- Opening a business bank account
- Filing corporate taxes
The EIN can be obtained for free through the IRS website or by submitting a paper application (Form SS-4).
6. Create Corporate Bylaws or an Operating Agreement
Corporate bylaws (for corporations) and operating agreements (for LLCs) outline the company’s internal rules, governance structure and decision-making processes. These documents typically include:
- Roles and responsibilities of owners, directors, and officers
- Voting procedures for major business decisions
- Guidelines for adding or removing shareholders or members
- Rules for distributing profits and handling disputes
While some states do not require these documents for incorporation, having them in place is good business practice. Written bylaws can do much to prevent future conflicts and provide clear operational guidance.
7. Register for State and Federal Taxes
Depending on the business structure and location, additional tax registrations may be required, including:
- State corporate income tax
- Sales tax permits for businesses selling taxable goods and services
- Payroll tax registration for companies with employees
Many states provide online business portals where companies can register for tax accounts and licenses in one place.
8. Obtain Necessary Business Licenses and Permits
Certain industries and locations require additional licenses and permits. These may include:
- General business licenses issued by local governments
- Professional licenses for regulated industries (e.g., healthcare, legal, financial services)
- Zoning permits if operating from a physical location
Businesses must check with local, state and federal agencies about licensing. Many businesses have few or no license requirements. But, checking is essential for compliance with all necessary regulations.
9. Open a Business Bank Account
A business bank account separates personal and business finances, making it easier to track expenses, manage cash flow and comply with tax regulations. Running a business from the owner’s personal bank account is possible in some cases but is discouraged. To open an account, banks typically require:
- The EIN issued by the IRS
- Articles of Incorporation or an operating agreement
- A business license (if applicable)
Maintaining separate accounts also reinforces the limited liability protection provided by incorporation. If liability shielding is important, set up business accounts.
10. Comply With Ongoing Filing and Compliance Requirements
Incorporation is not a one-time task. It comes with ongoing compliance obligations, including:
- Annual reports filed with the Secretary of State
- Renewal of business licenses and permits
- Tax filings and estimated payments
- Corporate meetings and record-keeping for corporations
Failing to meet these requirements can result in penalties, loss of legal protections or administrative dissolution of the business.
Frequently Asked Questions
What Is the Difference Between an LLC and a Corporation?
An LLC is a flexible business structure that provides liability protection while allowing income to pass through to owners for tax purposes. A corporation is a separate legal entity with more complex regulatory requirements, including shareholder meetings, board governance and corporate taxes.
How Long Does It Take to Incorporate a Business?
The timeline varies by state but generally takes one to four weeks. Some states offer expedited processing for an additional fee.
Do I Need a Lawyer to Incorporate a Business?
No, but legal guidance can be beneficial, especially for businesses with multiple owners or complex structures. Many entrepreneurs use online incorporation services to streamline the process.
Can I Incorporate in One State and Operate in Another?
Yes, businesses can incorporate in one state and register as a foreign entity in other states where they conduct business. This may require additional filings and compliance with multiple state regulations.
What Are the Tax Benefits of Incorporating a Business?
Incorporation can provide tax advantages such as deductible business expenses, lower self-employment taxes for certain structures and tax deferral opportunities. The specific benefits depend on the business structure and state tax laws.
Bottom Line
Incorporating a business provides long-term benefits, including legal protection and financial credibility. By following these steps and maintaining compliance with state regulations, entrepreneurs can set up their businesses for growth and success. Working with a financial advisor can help business owners manage tax obligations, optimize financial planning and maintain long-term profitability.
Tips for Tax Planning
- A financial advisor can help you create a tax plan for your business. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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