Evaluating Incorporating a Business or Forming
a Limited Liability Company (LLC)

By Business Filings Incorporated, www.bizfilings.com

One of the first decisions you may face as a business owner may be whether or not to incorporate your business or form a limited liability company (LLC). Perhaps you have already been operating your business as a sole proprietorship or partnership, and are considering changing your business structure. Whether or not you should incorporate will depend on your particular business objectives and goals. If you consider taking this important business step, here are some questions and items that may help as you evaluate whether or not to incorporate.

What Business Structure is Best for My Business?

There are a number of business structures available for businesses. While this article will not cover each structure’s potential advantages and disadvantages, we will mention them for your consideration.

• Sole proprietorship – where the owner and the business are legally considered to be the same.
• General partnership – where two or more people are owners of the business. As with sole proprietorships, the partners and the business are legally considered the same.
• Limited partnership – where two or more people are owners of the business, but there are different levels of partners, general partners and limited partners.

  The primary advantage of incorporating a business is often considered to be the limited liability afforded to the owners.

• C corporation – a legal entity that exists separately from its owners.
• S corporation – a standard corporation that elects a different tax status with the Internal Revenue Service (IRS).
• Limited liability company (LLC) – an entity that combines the limited liability characteristic of a standard corporation with the pass-through tax treatment of an S corporation.
• Nonprofit corporation – a corporation organized without a profit motive (also known as a not-for-profit).
• Professional corporation or LLC – a type of corporation or LLC that most states require be formed if the business will be providing services that are licensed, such as medical, dental, actuarial, or architectural services.

There are a number of online resources available to you to find more information on these business structures. Such resources include legal-oriented Web sites, the Small Business Administration, www.sba.gov, and online incorporation service providers.

What Is the Primary Advantage of Incorporating?

For many new business owners, incorporating also helps them establish credibility with potential customers, vendors, employees, and partners.

The primary advantage of incorporating a business is often considered to be the limited liability afforded to the owners. Because the owners are legally separate from the business, their personal assets typically cannot be used to satisfy business debts.

Other advantages such as certain tax benefits, ability to set up qualified retirement plans more easily, and specifically with corporations the ability to raise capital more easily also exist. For many new business owners, incorporating also helps them establish credibility with potential customers, vendors, employees, and partners.

The primary disadvantage to incorporating is typically viewed as the cost of establishing the entity with the state, and the ongoing annual requirements imposed on corporations and LLCs by the states. C corporations face “double taxation” where the profits of the company are taxed first at the corporate level and again at the individual level if distributed to

The primary disadvantage to incorporating is typically viewed as the cost of establishing the entity with the state, and the ongoing annual requirements imposed on corporations and LLCs by the states.

shareholders in the form of dividends. While this may be considered a disadvantage to forming a C corporation, both S corporations and LLCs allow for “pass-through taxation” which eliminates the double tax. With pass-through taxation, the profits or losses of the business are passed-through the company and are reported on the owners’ personal tax returns, with the necessary taxes being paid at the individual level.

How Do I Incorporate a Business?

If you decide to form a corporation, LLC, nonprofit, or limited partnership, you will need to file the necessary documents, often called the certificate or articles of incorporation for corporations or the certificate or articles of organization for LLCs, with the state in which you wish to form your business. All states impose state filing fees that must be paid to form your business there. These fees vary by state and entity type, but range from $50 to over $500.

Do It Yourself, Use an Incorporation Service Provider, or Use an Attorney
As far as by which means you can incorporate, you have three primary options for incorporating your business. You can do it yourself, or use an incorporation service provider, or use an attorney or accountant.
If you choose to do it yourself, it would be beneficial to familiarize yourself with the requirements of your intended state of formation. You can typically learn about a state’s business formation requirements on the Secretary of State’s Web site. You will then need to prepare the necessary documents and submit them to the state along with the required filing fees.

If you prefer to use an incorporation service provider, the provider will prepare and file the documents for you, and pay the necessary state filing fees. Reputable service providers will offer a breadth of information on their Web sites, allowing you the opportunity to learn more about incorporating and the process itself. Also, many providers have a staff of knowledgeable customer service representatives with whom you can speak further to discuss any basic questions you may have about forming a business. One thing to remember is that these providers cannot provide legal or financial/tax advice. They can only provide general information to help you make an informed decision.

If you prefer to use an incorporation service provider, the provider will prepare and file the documents for you, and pay the necessary state filing fees.

When placing an order, the provider will typically ask around 10 questions about you and your business that provides the necessary information required to complete the formation documents. With an incorporation service provider, you will typically pay a service fee plus the required state filing fees. Service fees often range from $75 to $175.

If you choose to use an accountant or attorney, you can seek advice that is specific to your particular business situation, such as learning which business structure best suits your overall business goals. Attorneys can often also provide customized documents for your company, such as bylaws or agreements, you would use in your business transactions. With an attorney or accountant, you will typically pay their hourly rate for the time spent on your incorporation, plus the state filing fees. Hourly rates vary by state and the accountant or attorney, but can often range from $75 to over $250 per hour.

If you choose to use an accountant or attorney, you can seek advice that is specific to your particular business situation, such as learning which business structure best suits your overall business goals.

One other thing to consider is that if you use an incorporation service provider, attorney, or accountant, you can often enlist their services for other items that are complementary to the formation. For example, incorporation service providers can often offer assistance with obtaining a federal tax identification number (also known as the employer identification number or EIN) for your business from the IRS, help with preparing the S corporation election form, and offer templates to help your business comply with state-required corporate formalities.

How Long Does It Take?

Keep in mind that the states impose annual requirements on all corporations and LLCs, such as filing an annual report.

The time the state requires to approve and return your completed articles of incorporation or articles of organization varies by state. Often, it can take up to 4-6 weeks to become incorporated. Most states will allow you to expedite the filing process for an additional charge; expediting filings typically take about one week. Those charges also vary by state.

After Incorporation – Next Steps

In terms of requirements imposed on corporations and LLCs after formation, corporations have more strict obligations to follow. After a corporation is formed, an organizational meeting of directors must be held. At this meeting bylaws are adopted, stock is issued, and the incorporation process is completed. Minutes of the organizational meeting should be kept in a corporate record book. Corporations are also required to hold annual meetings of directors and annual meetings of shareholders. Not holding these meetings and keeping the proper records of them can have serious consequences for corporations.

For LLCs, the requirements are not as strict, but it is still advisable to hold an organizational meeting of the members or managers after formation in order to adopt an operating agreement and issue membership shares. It is also a good idea to hold regular meetings of the members or managers, to properly document major business decisions, and to keep complete company records.

Keep in mind that the states impose annual requirements on all corporations and LLCs, such as filing an annual report. This report allows the state to keep updated information on corporations and LLCs formed or qualified to do business there. Each state’s requirements for the report differ, as do the costs associated with them. Many states also impose annual franchise taxes on corporations and LLCs. It is recommended to research the annual requirements of the state in which you are evaluating incorporating your business, so that you know what to expect on an ongoing basis.

Summary

The resources available today for small business owners and aspiring entrepreneurs have made the process of incorporating a business quite easy and affordable.

Once you decide to incorporate your business, and decide which business structure your company will take, you will also need to consider in which state you wish to incorporate, who will hold the director and officer positions (if you are forming a corporation), or the member/manager and officer positions (if you are forming an LLC) in your company. These questions will all be typically be asked of you whether you form your own business with the state, use an incorporation service provider or use an attorney. After you have incorporated, be sure to undertake the ongoing requirements for corporations and LLCs that were mentioned above.

While this process may seem a little unnerving right now, the truth is that the resources available today for small business owners and aspiring entrepreneurs have made the process of incorporating a business quite easy and affordable.



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