Many SMB owners have decided to incorporate in order to take advantage of specific benefits and to protect personal assets. Businesses that plan to offer shares or go public at some point in the future may want to look into incorporation. Business owners may want to know if it is important to incorporate from the outset of starting a business or should a small business owner wait to incorporate?
Different corporation entities exist, as does the option of operating a business as a sole proprietorship. All entrepreneurs and small business owners looking to expand their business and limit their legal liability may want to look into incorporation. Learn more about the types of corporate entities and important considerations that apply specifically to incorporation.
Types of Incorporation
There are essentially two options when deciding to incorporate. Business owners will choose either an S corporation or a C corporation. Businesses over 100 shareholders may choose a C type. Otherwise, smaller businesses often choose an S corporation. Taxation is different between these two entities. In addition, both common and preferred stock may be available with a C corporation. It is often necessary to work with a corporate lawyer to avoid the potential of a costly mistake.
When should business owners incorporate? Business owners want to incorporate when they want to reduce their personal liability in the case of outstanding business obligations. A business in a high risk business industry, hiring a significant number of employees, or that will own property, equipment or vehicles in order to operate may want to give serious thought to incorporation.
A business owner may operate a small business as a sole proprietorship, such as a small real estate investment firm. However, as the business grows and more property and employees are involved, it becomes necessary to understand more about the increased liability that one of more business owners will be subjected to and how to mitigate higher risks involved in operation.
Important Considerations for Small Business Owners
There are a number of factors worth thinking about prior to incorporating a business. First of all, it is important to decide on which state to incorporate within as every state has its own set of rules regarding incorporation. The laws of the state used will be applied to the governance of any business or dispute. Delaware is a popular state as it has state corporate tax laws favorable to business owners and is experienced with the handling of corporate legal issues. When incorporating outside one’s state where the business is located, select a designated agent to receive formal notices and more.
An SMB owner should be aware that the type of corporate entity chosen can significantly alter tax and liability consequences. Choose a C corporation and have profits taxed twice. However, select an S corp and profits are taxed once and are passed to the shareholders.
It is important to decide on a few important factors prior to registering a company. It will be necessary to file articles of organization within the state chosen for incorporation. As such a small business owner will need the corporation’s name, the office that is registered as the location for the corporation, the registered agent’s contact information and a few other details. If a stock corporation will be formed, more details on the shares and starting value will need to be provided.
Follow Stated Guidelines
Business owners need to follow guidelines that are related to the business regulations of the corporation chosen. Depending on the type of incorporation, it may be necessary to hold regularly board meetings, have a separate account for business banking, and file corporate tax returns in a timely manner. This will help business owners protect their personal assets and funds should litigation be necessary.