When starting your own business, you have a big decision to make: Do you want to start a sole proprietorship, a partnership, a limited liability company or a corporation? When the latter is your goal, it would help to know the pros and cons of incorporation, as well as the steps for incorporating your business so that you are well within the law at all times. Forming your business as a corporation does have many benefits, but it also has a few drawbacks. Before we get to the steps involved, let’s focus on why you would want to incorporate your business and the possible downsides of doing so.
The Benefits Of Incorporation
Forming your business as a corporation has the prime benefit of relieving you (and any other shareholders) of responsibility as far as company debts and obligations are concerned. For example, if someone feels that they have been slighted by your company, they can’t come after you personally, they would have to sue the company as a whole. Incorporating your business essentially creates a separate legal entity apart from yourself and anyone else who is involved with starting the business or owning shares. It is essentially a legal person in the eyes of the law and that means that it can bring lawsuits, buy and sell property, be taxed and it can even commit crimes. Also, if you have plans to go public one day, forming your business as a corporation is definitely the way to go.
The Downsides Of Incorporating Your Business
The cons to forming a corporation include the cost (it is much more expensive to incorporate your business than it is to start a sole proprietorship or partnership, for example), the paperwork and legal loopholes that you have to jump through and the fact that you will be required to hold annual meetings with shareholders. In addition, you must uphold the wishes of those shareholders throughout the life of the company.
All in all, besides the cost, extra paperwork and formalities, incorporating your business is the way to go if you have big dreams and the business model to fulfill those dreams. If you would like to move forward, the following steps will help you start your business as a corporation.
Certificate Of Incorporation
The process of forming your business as a corporation begins at the state level. This involves a certificate of corporation, which lists the name of the corporation, the purpose of the business, the names and addresses of anyone involved with the business and the rights and privileges of each stockholder.
The name of your business should be distinct from any other business operating within the state. You will usually be told if you have to choose a different name after you’ve submitted the application. You also can’t choose a name that is misleading or dishonest. This will also be confirmed at the time of incorporating your business.
When stating your business’s overall mission statement or purpose, you must be very specific. You also must specify the length of time the business will operate for. Most corporations are designed to operate indefinitely until such time as they merge with another business or go bankrupt. This is opposed to a sole proprietorship, for instance, which is usually designed to operate for the lifespan of the person who created it. A corporation can be sold or transferred to other parties much easier due to the shares of stock that are formed at the time of incorporation.
Types Of Corporations
The above information will help when forming a business as a C Corporation. The other type of corporation is known as the S Corporation, which comes with additional requirements. For example, if you are incorporating your business as an S Corporation, you must be an independent group that isn’t affiliated with any other group, you must have a single class of stock and you must have no more than 35 stockholders. The corporation must also be classified as one of a domestic nature.
Whether you plan on incorporating your business as a C or S Corporation, it is always advised that you meet with a qualified business attorney so that you can get all the legal advice you need before getting in too deep. The law is very specific and the paperwork can become complicated if you are not very familiar with terms or certain business processes. However, if you do plan to go ahead with incorporation, you will effectively join the millions of other corporations around the world that operate as legal entities in and of themselves and, who knows, your business might even become a household name one day just like Apple, Facebook or Microsoft. As they say in the business world: if you are forming your own business, go big or go home.