Should I Incorporate?
The single most important reason people incorporate their business is to safeguard the personal assets of the owners, the shareholders of the corporation. By incorporating or forming a Limited Liability Company (LLC), owners may engage in business without exposing their personal property to undue risk. Forming an LLC or incorporating your business is one of the best ways to protect you from personal liability.
Benefits of Incorporating or
Forming an LLC
Corporations and LLCs are separate legal entities that provide some compelling advantages. By forming a corporation or LLC, you can:
Reduce your personal liability. While owners of a sole proprietorship or general partnership have unlimited liability for both business assets and personal assets, including their homes, cars and even savings, owners of corporations maintain separate business and personal identities. And that means you can limit the risk of losing your personal assets.
Save on taxes. Corporations are taxed at a lower rate than individuals. In addition, Incorporating or forming an LLC may enable expenses, such as insurance, travel and entertainment for you and your employees to be treated as deductible expenses of the business.
Improve your credibility. A corporate structure can send a powerful message to your customers, suppliers and other business associates about your commitment to the ongoing success of your venture. For many, "Inc." or "LLC" symbolizes permanence, credibility and stature.
Attract investors. Corporations may raise capital through the sale of stock. Investors may prefer to purchase shares in a corporation due to reduced personal liability.
Ensure a continuous life. Corporations are enduring legal business structures, with a life that extends beyond the illness or even death of its owners. Incorporating avoids the legal entanglements or, worse yet, termination of business that can incur if a partner or sole proprietor dies.
Transfer ownership. Incorporating allows you to transfer business ownership through the sale of stock.
Centralize management. In a corporation, your board of directors holds the power to make major business decisions and binding agreements, as opposed to a partnership, which puts this power in the hands of each general partner. So rather than worry that somebody could make a decision that could result in serious financial difficulty to you or your company as a whole, incorporating assures that all major players in your company stay on board and informed.
Ready to Incorporate?
The process to incorporate or form an LLC online takes just 10 minutes. If you have any questions along the way, call 1-(800) 818-0204 to speak to one of our Incorporation Specialists.
Limited Liability Company (LLC)
The LLC is a type of hybrid business structure that is designed to provide the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. A popular choice for sole proprietors who are looking to incorporate simply to protect personal assets or secure additional loans, the LLC is thought to be one of the easiest and least expensive forms of ownership to organize. The Limited Liability Company (LLC) is now a recognized business structure in all 50 states plus the District of Columbia. LLCs are gaining popularity with small business owners because they combine the advantages of a corporation with the tax advantages and management flexibility of a partnership
What are the main advantages of forming an LLC?
- Owners of an LLC have limited liability for business debts.
- For tax purposes, the allocation of profit and loss of an LLC need not be proportional to ownership interests.
- With an LLC, there is no double taxation threat since the LLC is not a separate taxable entity.
- You do not need to be a US citizen to own or invest in an LLC.
S Corporation
A subchapter "S" Corporation, also called an S Corporation, is a corporation that once incorporated, elects a special tax status. The Subchapter S tax election enables the shareholder to pass through earnings and profits directly to their personal tax return.If the corporation has a profit, the shareholder, if working for the company, must pay themselves wages that meet the standards of "reasonable compensation."
What are the main advantages of forming an S Corporation?
- An S Corporation is said to have less risk from government audits as a corporation (as opposed to sole proprietor or LLC)
- Owners of an S Corporation have limited personal liability for business debts
- With an S Corporation, owners can use corporate losses to offset income from other states.
- Owners of an S Corporation can save on employment taxes by taking distributions instead of salary.
- Owners of an S Corporation can save on employment taxes by taking distributions instead of salary.
- With an S Corporation, there is no double taxation threat because the corporation is not a separate taxable entity.
How to Form an S Corporation
In order to form an S Corporation, proceed with the filing of a regular C Corporation since the articles of incorporation that are filed with the state are the same for both the C Corporation and the S Corporation. After you receive all the paperwork back from the state, go ahead and fill out the IRS form 2553, Election by a Small Business Corporation, and submit the form to the IRS. This S Corporation form is included in the Corporation Complete Package. Differences between an LLC and a S Corporation
It's smart to protect personal assets from business debts and liabilities. Both owners of S Corporations and LLC's enjoy limited personal liability. By contrast, sole proprietors and partners have unlimited personal risk.
Traditionally, business owners who chose to form an entity to protect personal assets but allow income/losses to be reported on a personal tax return had to create an S Corporation. Today, that can also be accomplished with an LLC. All 50 states and District of Columbia recognize LLC's, and their popularity has soared. Nolo's Legal Guide for Starting and Running a Small Business states, "For the majority of small businesses, the relative simplicity and flexibility of the LLC make it the better choice. This is especially true if your business will hold property, such as real estate, that's likely to increase in value."
Both S Corporations and LLCs allow owners to avoid "double taxation" and to pay income taxes on a flow-through basis like sole proprietors and partners. However, LLC's are quickly becoming a preferred entity among small business. Here are some key examples of the benefits of an LLC verses an S Corporation:
- An LLC is simpler and faster to form. It may be formed in one step, while an S Corporation election can only be made after a General Corporation is formed first.
- An LLC is not required to hold annual meetings or to keep formal minutes, while an S Corporation is required to do so.
- LLC members can split profits/losses in any way they choose. In an S Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business.
- An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation .Other entities generally may not own an S Corporation.
While many business owners are enjoying the simplicity and flexibility of the LLC, it may not be the best choice in every case:
- If you are professionally licensed and live in California, you may not be able to form an LLC. Live in California? Read more about the specifics of a California LLC.
- Enticing or compensating employees with stock options or stock bonuses requires forming a corporation since LLC's do not issue stock.
- S Corporation shareholders pay Medicare and Social Security tax only on money received as wages or salary, but not on profits received as dividends or that stay within the company. Under certain conditions, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits. In particular, LLC's that provide professional services such as health, law or engineering should consult a tax advisor on this issue.
Different Forms of Business Entities
| Entities Characteristics |
LLC Limited Liability Company |
C Corporation |
S Corporation |
| Ownership Rules |
Unlimited number of members allowed |
Unlimited number of shareholders; no limit on stock classes |
Up to 100 shareholders; only one class of stock allowed |
| Personal Liability of the Owners |
Generally no personal liability of the members |
Generally no personal liability of the shareholders |
Generally no personal liability of the shareholders |
| Tax Treatment |
The entity is not taxed (unless chosen to be taxed); profits and losses are passed through to the members |
Corporation taxed on its earnings at a corporate level and shareholders are taxed on any distributed dividends |
With the filing of IRS Form 2553, a C Corporation becomes a S Corporation, where the profits and losses are passed through to the shareholders |
| Key Documents Needed for Formation |
Articles of Incorporation;Operating Agreement |
Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger |
Articles of Incorporation; Bylaws; Organizational Board Resolutions; Stock Certificates; Stock Ledger; IRS & State S Corporation election |
| Management of the Business |
The Operating Agreement sets forth how the business is to be managed; a Manager can be designated to manage the business |
Board of Directors has overall management responsibility; Officers have day-to-day responsibility |
Board of Directors has overall management responsibility; Officers have day-to-day responsibility |
| Capital Contributions |
The members typically contribute money or services to the LLC and receive an interest in profits and losses |
Shareholders typically purchase stock in the corporation, either common or preferred |
Shareholders typically purchase stock in the corporation, but only one class of stock is allowed |
Where Should I Incorporate?
This is one of the most common questions for businesses wishing to form a corporation or LLC. It's usually best to incorporate or form a limited liability company in your home state however, an entity may elect to incorporate outside the state in which the corporation conducts a majority of its business and choose to incorporate in any of the 50 states or the District of Columbia.
Advantages:
- Typically the least complicated, if you only plan to operate the business in your home state.
- Avoid paying franchise taxes and filing annual reports in more than one state.
- Usually costs less to incorporate locally.
Disadvantages:
- May miss out of the advantages of forming a corporation or LLC in Delaware or Nevada.
Incorporation Friendly States
Due to their unique incorporation laws and favorable tax policies, certain states are well known as favorable homes for corporations. If you'll be doing business in multiple states, you may want to consider incorporating in Nevada or Delaware .
Popular States for Incorporation:
- Arizona
- California
- Delaware
- Florida
- Nevada
- New York
Doing Business in Multiple States?
Many companies conduct business throughout the U.S. and abroad. A corporation having business locations in multiple states may form a corporation or LLC in a single state, then "qualifies to do business" in other states. This means companies must formally register, file annual reports and pay annual fees to obtain authority to conduct business in those states; and benefit from the laws of the state.
The Company Corporation can assist you in qualifying your corporation or LLC and keeping track of corporate filing requirements in any state you choose via our exclusive Compliance Watch SM Service.
Business Formation Options
To assist you with incorporating or forming an LLC, The Company Corporation has developed the following product options to simplify the process and match your budget.
1) Economy Package:
- Preparation and filing the articles of formation for your new company
- Name search and reservation
- One year of Registered Agent service from The Company Corporation
- Free subscription to our Quarterly Business Builder eNewsletter
- Full year of access to our Compliance Watch service (email reminder and calendaring system for compliance with state and federal regulations)
- Overnight delivery, once we receive your documents from the state
- Incorporate Now for $199 plus state fees
2) Complete Package:
- Preparation and filing the articles of formation for your new company
- Name search and reservation
- One year of Registered Agent service from The Company Corporation
- Free subscription to our Quarterly Business Builder eNewsletter
- Full year of access to our Compliance Watch service (email reminder and calendaring system for compliance with state and federal regulations)
- Overnight delivery, once we receive your documents from the state
- Expedited handling/walk-in service
- Personalized Corporate Kit including:
- A Corporate Seal
- Stock Certificates and Stock Transfer Ledger
- Sample Forms for Bylaws and Minutes
- Tax Id form, S-Corp election form and tax classification
- A four-book legal reference library published by Nolo Press including:
- Legal Forms for Starting & Running a Small Business (w/ CD-ROM)
- Tax Savvy for Small Business
- Legal Guide for Starting & Running a Small Business
- The Corporate Minutes Book: A Legal Guide to Taking Care of Corporate Business or Your Limited Liability Company: An Operating Manual
- Incorporate Now for $380 plus state fees
3) International Package: (for clients outside the U.S. & Canada)
- Preparation and filing the articles of formation for your new company
- One year of Registered Agent service from The Company Corporation
- Full year of access to our Compliance Watch service (email reminder and calendaring system for compliance with state and federal regulations)
- Express overseas delivery service, once we receive your documents from the state
- Apostille that authenticates the signature of the U.S.-based Secretary of State
- Personalized Starter Kit including:
- A Corporate Seal
- Stock Certificates
- Stock Transfer Ledger
- Sample Bylaws Forms
- Incorporate Now for $515 plus state fees
4) Shelf Companies:
The Company Corporation maintains a supply of companies previously incorporated in Delaware that have never been completely organized by naming directors and that have never conducted business. These organizations are called "shelf companies" because they are "on the shelf" waiting for purchase.
Call 1-(800) 818-0204 for a list of available companies and pricing. Upon purchase, shelf companies are completed with Certificate of Incorporation, election of directors, and a Compliance Corporate Kit. The cost of purchasing shelf companies varies depending upon the year of incorporation. For an additional fee of $268, the name can be changed on any shelf company.
Selected an Incorporation Option?
Click here to purchase an incorporation package online or call one of our Incorporation Specialists at 1-(800) 818-0204 for personal assistance.
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