Formalizing a business venture through incorporation can be one of the most significant steps an entrepreneur takes. In 2023, 5.5 million new businesses were started in the US, many of which will ultimately become incorporated. Those that do will gain access to a range of benefits, from asset protection to potential tax advantages.

The decision to incorporate demands a careful understanding of the legal, financial, and operational implications that come with it. Every choice you make during the process, from the name of the business to who sits on the board of directors, will impact the company’s future. With the right planning, research, and foresight, this process can serve as a powerful foundation for sustainable resilience and growth.

Below, we’ll cover the key steps of incorporation as well as how to navigate the process skillfully. Whether you’re a seasoned business owner or a first-time entrepreneur, here’s what you should know.

What’s in this article?

• What does it mean to incorporate?
  
• Benefits of incorporating your business
  
• Types of corporate structures to choose from
  
• How to incorporate
  

What does it mean to incorporate?

Incorporation is the legal process of forming a corporate entity, distinct from its owners, which is recognized as having its own rights, responsibilities, and liabilities.

Benefits of incorporating your business

There are several advantages to incorporating a business. Common benefits that most businesses gain access to when they incorporate include:

• Liability protection: A corporate entity limits personal liability because the corporation is held responsible for its debts and liabilities. Typically, shareholders’ personal assets remain insulated from corporate obligations.

• Tax flexibility: Corporations often have access to tax rates and deductions that are not available to sole proprietorships or partnerships.

• Raising capital: Corporations can issue shares of stock, which provides a more structured and widely accepted method for attracting investment.

• Perpetual existence: Corporations continue to exist even if ownership or management changes. This continuity can be beneficial for long-term business planning.

• Transferability of ownership: Shares of a corporation can be sold or transferred more easily than interests in other business structures.

• Attracting and retaining employees: Offering stock options or benefits can be more feasible for a corporation, making it a more attractive place for potential hires.

• Credibility: Incorporation can add legitimacy to a business, potentially increasing trust and relationships with suppliers, customers, and lenders.

• Business credit and funding: As a distinct legal entity, a corporation can establish its own credit history, separate from its owners, which can assist in securing loans or lines of credit.

• Deductions: Corporations may deduct normal business expenses, including salaries, before they allocate income to owners.

Types of corporate structures to choose from

Choosing the right corporate structure is fundamental to a business’s legal, financial, and operational framework. Different corporate structures cater to different needs, objectives, and business scenarios. Here’s a rundown of each corporate structure’s key traits:

• Sole proprietorship

  • Represents a single individual in business, as an individual.
    
  • Offers the owner complete managerial control.
    
  • The owner bears all the financial responsibilities, meaning personal assets can be at risk.
    
  • Taxes are paid as personal income, and there’s no distinction between personal and business assets.
    

• Partnership

  • Formed between two or more individuals who agree to contribute resources (money, skills, property) to the business.
    
  • Profits and losses are shared according to the agreement, and each partner is personally liable.
    
  • There are two types of partnerships: general partnerships—in which all partners share liabilities and managerial duties—and limited partnerships, where only one partner has unlimited liability, and the rest have limited liability based on their contribution.
    
  • Taxation is passed through to partners’ individual tax returns.
    

• Limited liability company (LLC)

  • Combines the benefits of a corporation and a partnership.
    
  • Owners, referred to as members, aren’t personally liable for the company’s debts.
    
  • Profits and losses can be passed through to personal income without facing corporate taxes.
    
  • Offers flexibility in business operation decisions.
    

• C corporation (C corp)

  • A legal entity separate from its owners, offering the most protection against personal liability.
    
  • Ownership is determined by shares of stock, allowing for an easier transfer of ownership.
    
  • Profits are taxed at the corporate level, and then any dividends distributed to shareholders are taxed again at the personal level, leading to double taxation.
    
  • Suitable for businesses planning to go public or seeking venture capital.
    

• S corporation (S corp)

  • Operates similarly to a C corp but avoids double taxation by allowing profits and some losses to be passed through directly to owners’ personal income.
    
  • Restrictions exist on the number and type of allowable shareholders.
    
  • Provides the same personal liability protection as a C corp.
    

• B corporation (B corp)

  • A for-profit corporate entity with an emphasis on social responsibility.
    
  • Balances profit and purpose, addressing social and environmental issues.
    
  • Certified by third-party standards on performance, accountability, and transparency.
    

• Nonprofit corporation

  • Formed to conduct activities without a profit motive, often for charitable, educational, religious, literary, or scientific purposes.
    
  • Profits are reinvested into the organization’s mission rather than distributed to shareholders or members.
    
  • Can apply for tax-exempt status, but it must adhere to strict regulatory and reporting requirements.
    

• Cooperative (co-op)

  • Owned and operated by its members for their mutual benefit.
    
  • Members pool resources to achieve common goals, and profits are distributed among members.
    
  • Popular in sectors such as agriculture, retail, and housing.
    

Each structure offers unique benefits and challenges. When choosing a structure, you should evaluate factors such as taxation, liability, management preferences, and long-term goals.

Learn more about the differences between these structures, and get guidance on choosing the entity type that’s best for your business.

How to incorporate

Incorporating a business is a systematic process that sets a direction for the organization’s legal and operational parameters—parameters that will dictate key aspects of the business now and in the future. While specific procedures may vary based on location and the nature of the business, these are the basic steps for incorporating in the US:

• Choose a business name
  Selecting the right name for your corporation is both a branding exercise and a legal necessity. The chosen name should be distinguishable from other entities registered in your jurisdiction. Conduct thorough research using state databases to confirm name availability. Note that some states have specific naming conventions or restrictions.

• Select a registered agent
  A registered agent acts as the corporation’s official point of contact for legal proceedings. This agent, whether an individual or business entity, must be located within the state of incorporation and readily available during standard business hours. Their primary responsibility is to receive legal and state documents on behalf of the corporation.

• Prepare and file articles of incorporation
  Articles of incorporation is a foundational document that outlines key details about the corporation, including its purpose and information about shares. Once prepared, it’s filed with the designated state agency, usually the secretary of state. The articles lay the groundwork for the corporation’s legal existence and provide public notice of its intent to operate.

• Obtain an employer identification number (EIN)
  Securing an EIN from the Internal Revenue Service (IRS) is a mandatory step for most corporations. This unique nine-digit number allows the IRS to identify businesses for tax purposes. An EIN is typically required to establish business banking services and is helpful when applying for business licenses and permits.

• Draft corporate bylaws
  Corporate bylaws are an internal document that describes the operational procedures and governance structure of the corporation. This comprehensive document addresses the roles of directors and officers, stock issuance procedures, and the schedule and execution of corporate meetings, among other matters.

• Appoint directors
  Directors are responsible for significant business decisions and overall direction. Their appointment is integral to the corporation’s governance and provides guidance on its trajectory. Their roles, responsibilities, and tenure should be clearly defined to avoid any ambiguity.

• Hold the first board of directors meeting
  This initial meeting is a significant event during which key operational and administrative decisions are made, such as approving bylaws, clarifying roles, and deciding on the fiscal year. Keeping minutes of meetings is necessary for maintaining a transparent record of corporate decisions.

• Issue stock certificates
  Stock certificates are physical or electronic documents that signify ownership in the corporation. Issuing stock certificates ensures that every shareholder has a clear representation of their stake in the business. These records are key for transparency and any future transactions related to the sale or transfer of shares.

• Stay compliant with state requirements
  Each state has its own set of requirements and annual obligations for corporations. These can include filing annual reports, maintaining updated records, and paying associated fees. Be aware of these obligations and remain compliant to avoid penalties or potential dissolution.