Because a corporation or a limited liability company is considered a distinct legal entity with no ties to the individuals who own it as a legal structure, it is a very attractive option for small business owners. It gives you the opportunity to present your firm to the public as a bigger company than it actually is. It also gives you a better shot at obtaining long-term financing.
Because you are not held personally responsible for the corporation, your personal assets, including your personal bank accounts, may remain untouched if the business fails. There are, however, more regulations and government filings to deal with than there are in sole proprietorships and partnerships. Incorporating or forming an LLC does require some work and some costs both to set up and to maintain.
Keep in mind that the tax differences between an LLC and a corporation, especially a corporation that is not an S corporation, are significant.
Before you decide to incorporate, ask yourself:
- How much risk are you willing to absorb?
- If something happened to the principal(s), how long would the company be able to function?
- What legal structure would offer the greatest flexibility in terms of administration?
- How will the laws of the incorporating state influence your decision on method of incorporation
- What are your prospects for attracting capital?
- What is the goal of your enterprise?
- Are you willing to share control of the business with outsiders?
- Is there a tax advantage or incentive for you to incorporate?
Filing for Incorporation Overview
Although incorporation is considered the most complex of legal business structures, it is possible for a small business owner to incorporate without legal counsel—but I don’t recommend it. To minimize legal fees, you could obtain and fill out all forms for incorporation yourself. Forms and guidelines are available from your secretary of state’s office.
However, prior to filing with the state, you should have your attorney advise you as to whether incorporation is the right step for your business. If so, have him or her review your incorporation documentation to ensure that you have included all required information.
A corporation is formed with the authority of a state government. Incorporation allows capital stock to be issued while the principals create an organization. Approval for incorporation must be obtained from the secretary of state’s office after filing articles of organization. The secretary of state in the filing state will issue a charter for the corporation stating the powers and limitations of the corporation. Officers of the corporation can be employees of the corporation while owning stock in the corporation. Therefore, they can be held liable for such actions as withholding income tax, unemployment tax, workers’ compensation, and Social Security.