Frequently Asked Questions
What are the benefits of incorporation?
The main reason to incorporate (or form an LLC) is to minimize your personal liability and protect your personal assets. Once your business is incorporated (either by forming an LLC or Corporation), it exists as a separate business entity. Essentially, you put a wall separating your personal assets from anything in the business. Other reasons include:
• Get more flexibility when it comes to taxes
• Boost the credibility of your small business
• Start building your business credit
• Protect your business name and brand at the
state level
What are the drawbacks of incorporating?
You'll have to operate your business as a business and not a hobby, meaning you'll have increased levels of administrative work. Additionally, incorporating as a C Corporation can result in higher taxes due to double taxation. With a C Corporation, the business needs to pay taxes on any profits, and then owners are also taxed when any profits are distributed to them. However, there are ways to avoid double taxation, while still getting some of the benefits of incorporation.
What is an LLC?
An LLC (Limited Liability Company) is a hybrid of a sole proprietorship/partnership and corporation. This structure is very popular among small businesses, and for good reason. The LLC limits the personal liability of the owners, but doesn’t require much of the heavy formality and paperwork of the corporation. This makes
it a great choice for business owners that want liability protection, but don’t want to deal with exhaustive meeting minutes, addendum filings, or other paperwork you’d need to file as a corporation. You can structure your LLC to be taxed as an S Corporation where company profits flow through to the owners and are taxed at the personal income rate.
What's the difference between a C Corp and S Corp?
The C Corporation’s tax structure isn’t optimal for many small businesses, since business owners often are taxed twice on the profits. However, Corporations can elect for “S Corporation” tax treatment. Often called a “pass-through” entity, an S Corporation doesn’t file its own taxes. Rather, profits and losses of the business are passed through and reported on the business owner’s personal tax return. To qualify for S Corporation tax treatment, you’ll need to fill out Form 2553 with the IRS. You’ll need to do this no more than 75 days from the date of incorporation, or no more than 75 days from the start of the current tax year. Be aware that not
every business can qualify to be an S Corporation. For example, an S Corporation cannot have more than 100 shareholders and shareholders must be U.S. citizens or residents.
What's a non-profit corporation?
A nonprofit is created for charitable, educational, religious, scientific, and literary purposes. Nonprofits cannot benefit the owners: all money above operating costs must be used to further the goals of the nonprofit. This allows nonprofits to operate tax-free. Approval is needed at both at the State and Federal (IRS) level. Just like with other corporations or LLCs, a nonprofit corporation offers a corporate shield that helps protect the
personal assets of the nonprofit’s stakeholders. In most cases, as long as the legal structure remains correct, stakeholders of nonprofit corporations are immune from individual liability.
Where and when should I incorporate?
As a general rule of thumb, if your business will have fewer than five
shareholders, you should incorporate in the state where you actually live or where your business has a physical presence. When you incorporate in a different state from your physical presence, you’ll need to deal with added fees and paperwork since you’re considered “operating out of state.” And for most small businesses, the added hassle and fees just aren’t worth it. And as far as when, in most cases, it’s best to incorporate or form an LLC as soon as possible. After all, the main benefit is liability protection and by waiting to incorporate, you can be exposing yourself to liability. Keep in mind that your corporation's 'start date' is not retroactive. This typically means filing two business income tax returns for the
year. For example, if your corporation was formed on June 1, you’ll need to file as a sole proprietor (or whatever your previous entity may have been) from Jan. 1- May 31 and then file as a Corp. from June 1-Dec. 31.
How can I incorporate?
There are three common methods for incorporating
or forming an LLC. Each has its pros and cons
depending on your needs:
• Do-it-yourself: DIY is the lowest cost method, but
you’ll need to do everything yourself. This is the
best option if you’re more interested in saving
money than time. With this route, you need to be
able to deal with lots of details and arbitrary rules.
• Online legal filing service: This option is slightly
more expensive than DIY. An online legal filing
service will complete and file the documentation
for you. Like any legal document, the articles of
incorporation and application are full of tedious
details. A professional service can make sure
that your application is done right and processed
smoothly. THIS IS US!
• Lawyer: This is the most expensive option, but may
be necessary in certain situations. For example,
if you have complex requirements for how your
stock should be allocated or you are working with
millions of dollars, then you should turn to expert
advice. And whichever method you choose, you
may want to speak with a tax professional to
determine what business structure will be the
best for your particular circumstances.
Once I form a corporation or LLC, is my name protected in all 50 states?
No. Your name is not automatically protected in all 50 states. Upon the formation of your Corporation or LLC in one state, you are merely preventing another business from filing under the same name as a corporation or LLC in that same state. Trademark protection protects the name. You’re not actually required by law to register a trademark. Use of a name instantly gives you common law rights as an owner, even without formal registration. However, you should consider trademarking your name for proper legal protection. Trademarks registered with the US Patent and Trademark Office enjoy significantly stronger protection than common unregistered marks.
Once I form a corporation or LLC, am I done?
No. Your work isn’t entirely done after you submit that initial paperwork. For both the LLC and Corporation, you’ll need to file an Annual
Report (requirements vary by state). In addition, you’ll have to stay on top of any major changes (for example, did you authorize more shares?
Did a board member leave?) by filing Articles of Amendment.
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