You opened up your business. You have a physical business space and a store. You have a desk, a few comfortable chairs for your customers, and a business partner. That's all you needed, right?
You probably registered your business as a sole proprietorship or partnership when you started. However, you need to incorporate a business when your business starts growing.
But how do you know when to incorporate a business? Let's take a look closely at that.
What does it mean to incorporate a business?
The word corporation comes from the Latin word corpus, which means body. In the eyes of the law, a corporation is one legal body or entity that can:
- buy and sell properties
- enter contracts
- be taxed
- commit crimes
- bring lawsuits
As a business entity, a corporation exists as a separate business structure from its owners/founders to protect business owners from personal liability in cases of corporate debts and obligations. When you fill up your application form when incorporating a business, you will be required to state the following:
- The purpose of your corporation
- The name and address of you and your business partners (or incorporators)
- The type and amount of capital stock your corporation will be allowed to issue
- The rights, privileges, and responsibilities of the holders of each type/class of stock
Why is incorporating a business important?
Regardless of what type of company you set up, there will always be benefits and drawbacks. Obviously, there will be additional paperwork and expenses. And there's the additional tax burden. If you're in the early stages of your business operation, it's the last thing you want to worry about.
But more than the tax reason and the additional responsibilities, there's more benefits to incorporating a business. Here are some:
Advantages of Incorporating a Business
- Business incorporation protects its owners from personal liability arising from corporate debts and obligations
- When you incorporate a business, you will have access to a reliable body of precedents that will help guide you, your incorporators, and your managers
- If you have plans to become a public company, incorporating a business is the best way to start
- Business incorporation gives your corporation unlimited life
- If you incorporate a business, you can create tax benefits under specific circumstances
- It's easier to transfer corporation ownership through the transfer of stocks/securities
Disadvantages of Incorporating a Business
- After incorporating a business, you will be required to hold annual meetings and observe certain formalities
- Incorporating a business is more expensive than setting up a sole proprietorship or partnerships
- Business incorporation also means you need to file periodically with your state and pay annual fees
How do I incorporate my business?
It's difficult to tell when you need to start incorporationg a business but here's five tell-tale signs when you need to:
1. When you feel the need to require additional protection for your personal assets.
Imagine this scenario: An angry customer decided to file a lawsuit against your company. When the case progresses, the customer can only go after the company's resources--if you incorporate a business--and not your personal assets.
You are protecting your family.
2. When you feel the that you want to pass your company to your heirs.
When you're a sole proprietor, your business is under your name. And if you're like most people, you want to pass on your business to your children.
If you incorporate a business, you can quickly transfer your shares or stocks to your children via a sale or estate. This is the reason why we mentioned above that corporations have unlimited life. The ownership of a business or corporation can be easily passed on through sales of stocks.
3. When you need more credibility for your business.
Your business might be doing good, and your sales are skyrocketing. However, when dealing with banks or reeling in more investors, a corporation demands more trust than a sole proprietorship company.
4. When you want to attract and hire more talent.
You can get better talent and retain more employees if you offer stocks to high performers. If you need business advisers, you can also guarantee that your advisers are giving you the best advice if they also hold shares within your company.
5. When you want to take advantage of state and government-provided tax benefits.
Photo by Kelly Sikkema on Unsplash
If you don't incorporate a business, it's easy for the tax department to assume that every penny you earn goes into your pocket and, thus, is subject to personal taxes.
With business incorporation, you can deduct the salary that you pay yourself. Lower corporate tax rates apply to any of your income earned.
What are the steps I need to take to incorporate a business?
Filing to incorporate a business may differ between countries and states. Here are your general guidelines when you feel that you're ready to business incorporation:
1. Go to your state office responsible for registering corporations in your location. You can inquire first about their requirements, forms, and fees. Depending on where you live, you can file for business incorporation without the help of an attorney, which can save you thousands, if not hundreds, of dollars.
2. Prepare a certificate or articles of incorporation. Again, depending on where you're filing your business incorporation, your state office might have a printed form or template that you can use for this step. In general, this will require you to submit the following:
- the name of your business
- the name and addresses of your incorporators
- the location of the office of the corporation
3. Decide where to incorporate your business. You might not be required to file your business incorporation certificate where your company operates. If you decide to file in a different location, check tax benefits and incentives your company can take advantage of. Also in this case, it's better to check with your lawyer to consider other factors when transacting in a state outside of your location.
What are my next steps after incorporating?
After you incorporate a business, what do you do? Here's a few suggestions:
1. Apply for an employer identification number (EIN). An EIN is a number assigned to your company. Think of it as a social security number for your business. An EIN is assigned by your state and is used for tax forms.
You can get a business bank account and apply for business bank loans if you have an EIN. This is also required when hiring employees so you can set up your payroll system.
As an addition, having an EIN establishes more credibility for your company. It shows everyone that you are a business that is responsible and fully committed.
2. Apply for a business license and permit. You cannot operate your business or conduct transactions without the required business licenses and permits. Permits might include operating permits, building permits, sanitary permits, etc. The number of permits that you need to operate your business after incorporating a business depends on what your state requires.
3. Draft by-laws and operating agreements or procedures. This is a requirement for anyone who wants to incorporate a business. The by-laws include rules and regulations that will govern your corporation.
Your by-laws will generally contain the following:
- The structure of your business organization
- The duties and responsibilities of all incorporators and members of your organization
- The details of your board of directors
- The date and location of your directors' and shareholders' annual meetings
- The list of committees of your company
On the other hand, operating agreements outline the following information:
- Percentage of ownership of each incorporator
- Members' rights and responsibilities
- Members' voting powers
- Process of profits and losses allocation
- Management duties and responsibilities
- Duties of members, managers, and incorporators
4. Build a website for your company. Once you're done with all three steps above, including all the steps on how to incorporate a business, you're now ready for growth.
Image taken from Strikingly Product
Building a website for your business opens your products and services to a broader audience, not just within your region or country but globally. A website is also a great opportunity for your business to make a great impression and establish more trust in your potential clients that you're a real company. Between having a social media profile page and having a website, 84% of consumers feel that a business is more credible if they have a website.
If you build a website with Strikingly and sign up for any of our yearly plans, you get a domain for free. Imagine your business name as having a .com at the end--that's quite perfect, right?
Image taken from Strikingly Product
And when you have a domain with us, you can also get a branded email address from our platform. Imagine when your customer receives an email from firstname.lastname@example.org versus getting it from email@example.com. A branded email is perfect if you plan to run an email marketing campaign or send our monthly newsletters.
When you have a website and perform SEO, you can get a broader and newer audience through search engines. You may have a steady stream of customers right now, but to guarantee continued success, you need to attract new customers consistently. The best way to do that is by making yourself more visible in search engines.
Image taken from Strikingly Product
Incorporating a business requires time and commitment. You don't really need to do it right now if you're a startup, but it's something that you probably have to do very soon if you are serious about growth.