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The main reason to incorporate (or form an LLC) is to minimize your personal liability. 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. Of course, there are other benefits too. Here are the top reasons to incorporate:
• Minimize your personal liability and protect your personal assets
• Get more flexibility when it comes to taxes (talk to your CPA or tax advisor for specific advice on your personal situation)
• Boost the credibility of your small business
• Add a layer of privacy (don’t use your personal name and home address to represent your business)
• Start building your business credit
• Protect your business name and brand at the state level
The only real “drawback” of incorporating is that you’ll need to operate your business at a higher administrative level than you’re used to as a sole proprietorship. In addition, incorporating as a C Corporation can result in higher taxes for some small businessscenariosduetodoubletaxation. WithaC Corporation, the business needs to pay taxes on any profits, and then owners are also taxed when any profits are distributed to them. Obviously, if you’re looking to put your small business profits into your own pocket, you may end up paying a lot in taxes. However, as the following question shows, there are ways to avoid double taxation, while still getting some of the benefits of incorporation.
As mentioned above, 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.
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 (as described above) where company profits flow through to the owners and are taxed at the personal income rate.
A nonprofit is created for charitable, educational or other purposes (actually there are five recognized purposes: charitable, religious, scientific, educational, and literary). 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.
You often hear of companies incorporating in Delaware, Wyoming, or Nevada. That’s because Delaware offers flexible, pro-business statutes, while Wyoming and Nevada feature low filing fees, as well as no state corporate income, franchise, and personal income taxes. However, 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 (such as an office). 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.
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. 3
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.
• 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.
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 from filing under the same state as a corporation or LLC in that same state. What you are inquiring about is trademark protection. 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 — after all, you’ve spent untold hours deliberating on the ideal name, and you’ll be spending even more cultivating brand recognition. Trademarks registered with the USPTO (US Patent and Trademark Office) enjoy significantly stronger protection than “common law” (unregistered) marks. If you would like further information about Trademarking your company name or brand, simply contact a Corpnet.com representative, and we can assist you with your entire Trademark filing needs.
Yes. 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.
Too many entrepreneurs don’t realize that once the state grants your business its corporation or LLC status, there are ongoing business compliance requirements to meet to stay in good standing. Your diligence—or lack of—in adhering to the corporate formalities that apply to you can mean the difference between failing or succeeding in business. If you neglect to follow the rules or miss deadlines, you could face late penalties or worse—the state might even administratively dissolve your company and place it in non-compliant status. The implications of that could be devastating.
Fortunately, TRALG.CO is here to help entrepreneurs meet the compliance requirements for business. With our free online business compliance and monitoring tool*, the TRALG.CO’s Compliance Portal, you can stay on top of the many compliance requirements that apply to your company and their deadlines.
A beneficial ownership information report provides the Financial Crimes Enforcement Network (FinCEN) with information about registered business entities, their beneficial owners (individuals with substantial control over or 25% or more ownership interest), and their company applicants.
Most registered business entities meet FinCEN’s definition of a “reporting company.” Reporting companies can be either domestic or foreign. Domestic reporting companies are corporations, limited liability companies, and any other entities created by the filing of a document with a secretary of state or with any similar office under the law of a state or Indian tribe. Foreign reporting companies are entities (including corporations and limited liability companies) formed under the law of a foreign country that have registered to do business in the United States by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe.
So, LLCs, C Corporations, S Corporations, and other types of corporations fit the definition. FinCEN doesn’t specifically mention them, but different entity types — such as Limited Partnerships, Limited Liability Partnerships, Limited Liability Limited Partnerships, and Business Trusts — might also be reporting companies. Businesses, like Sole Proprietorships and General Partnerships, which do not register formation documents, do not have to file a beneficial ownership report.
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.
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. 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.
Yes and CorpNet can help reserve your business name if you’d like. A business name reservation consists of a filing with the Secretary of State’s office to reserve a business name until you are ready to incorporate your business or form a Limited Liability Company. Generally, a name reservation will be effective and the name that you place on reserve will be on hold for 30-90 days. Once the name reservation expires, that name becomes available for use to the general public for anyone who wants to use it.
A Sole Proprietorship is the simplest structure for operating a business owned by one person (or a married couple). By default, states will consider a single-owner business to be a Sole Proprietorship unless the owner (the sole proprietor) files business registration paperwork to form an LLC (Limited Liability Company) or a Corporation. Sole Proprietors are not considered employees of their companies. They get paid by withdrawing funds (taking “owner’s draws) out of their businesses for personal use. Many freelancers, consultants, and other professional service providers work as Sole Proprietorships. The Sole Proprietorship structure is also attractive to entrepreneurs in other industries, too (retail, landscaping, cleaning, and more). It’s common for entrepreneurs to start as Sole Proprietorships and then register their companies as formal business entities when they begin to grow or expand their businesses.
A partnership is a legal entity where two (or more) people run a business. Like a sole proprietorship, each partner owns a portion of the assets and liabilities of the business. The main difference is that a partnership relies on an agreement between the partners. This document, the partnership agreement, details ownership, and responsibilities.
A C Corporation is a standard corporation. It is considered a separate entity from its owners. This means that the corporation is responsible for any of its debts and liabilities. This is often called the “corporate shield” as it protects the owner’s personal assets from debts and liabilities of the business. A corporation has a formal structure consisting of shareholders, directors, officers, and employees. Every corporation must select at least one person to serve on its board of directors and officers are required to manage the day-to-day activities of the company. As a separate business entity, a corporation files its own tax returns. As a C corporation owner, you’ll need to file both a personal tax return and a business tax return. In some cases, this can result in a “double taxation” burden for small business owners (see the question on double taxation below for more details).
Whether that name is legally registered with the business’s home state or not, every business has a legal name. A DBA (or “Doing Business As” is a name that is different from the legal name of the company. A DBA is also referred to as the “trade name,” “assumed business name,” or a “fictitious business name.” A DBA lets the public know the true owner of a business. DBA laws are consumer protection laws. They exist, so consumers have full transparency on which companies they are transacting business with. In other words, DBAs prevent dishonest business owners from running a company under a different name to avoid legal problems.
You often hear of companies incorporating in Delaware, Wyoming, or Nevada. That’s because Delaware offers flexible, pro-business statutes, while Wyoming and Nevada feature low filing fees as well as no state corporate income, franchise, or personal income taxes. However, as a general rule of thumb, if your business will have fewer than five members or shareholders, you should form your business in the state where you actually live or where your business has a physical presence (such as an office.) 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.
Both the LLC and S Corporation structures are taxed on a pass-through basis. Income taxes are paid at the individual owner level rather than at the entity level. Profits and losses get reported on the owners’ personal tax returns. However, although LLCs and S Corporations are both pass-through entities, there are some differences in how taxes are handled.
Self-employment tax – Income of an LLC flows to the members involved with the business and is subject to self-employment tax. With an S Corporation, only salaries are subject to self-employment tax. Therefore, any distributions that paid out to S Corporation owners are not subject to Social Security and Medicare taxes.
Tax flexibility – The LLC offers a lot more flexibility in terms of how owners can be taxed. With an LLC, owners can determine their allocations for the year and be taxed accordingly. With an S Corporation, owners must be taxed based on their pro-rata ownership interests. For example, if one owner owns 50 percent of the business, then that person will be taxed on 50 percent of the company’s profits.
Formation fees will vary by state, however, if you’d like TRALG.CO to provide assistance, we do offer an easy-to-use price list so you can see the exact price for each service TRALG.CO offers.
LLCs must designate a registered agent in the state(s) where the company is registered. A registered agent (sometimes referred to as a resident agent) is a person or company officially recognized by the state that resides within the state of incorporation. It is designated by the LLC to accept service of process on behalf of the company. A registered agent may be an individual or another business entity with a physical location in the state of incorporation. Please note that a post office box or other mail service (e.g., UPS) is usually not sufficient to qualify as a registered agent. The agent is responsible for accepting official notices from the Secretary of State and service of process in the event the corporation is sued.
An LLC’s registered agent must be available Monday through Friday from 8 am to 5 pm at the location specified on the LLC’s Articles of Organization. The registered agent’s name and address are public information, therefore giving some privacy protection to an LLC’s owners.
The Registered Agent must be available Monday – Friday 8am to 5pm at the location specified on your Articles in order to accept service of process. The registered agent’s name and address are public information. If you wish to keep your company’s address information confidential, designating TRALG.CO™ to act as your registered agent affords you that extra added layer of privacy.
Articles of incorporation is a legal document containing important information about the company, and it must be approved by the Secretary of State office. Filing Articles of incorporation registers the company as a corporation (C Corporation) with the state. It makes the business a separate legal and tax-paying entity from its owners, giving its incorporators and shareholders personal liability protection from the company’s legal and financial problems.
After receiving state approval of its articles of incorporation, a business is considered “domiciled” in that state (in other words, the state is the corporation’s “home” state). The company goes on record as a domestic corporation in the state, and the corporation must conduct business according to the laws and codes of that state.
Having an Employer Identification Number (or EIN) helps separate you from your business. If you don’t have one, you will use your social security number on any business licenses, permits, and tax forms. Using an EIN keeps your business at arm’s length. Getting a Federal Tax ID number is optional if you’re a sole proprietorship, but if your business acts as a Corporation, Limited Liability Company, or a partnership, you are required by law to have one.