How to Incorporate - The formal mechanics of corporation is known as "incorporation." The process, which answers the question How to Incorporate? involves completing and filing a "Certificate of Incorporation" or "Articles of Incorporation" and paying a filing fee. Each state has its own set of laws governing the process of incorporating.
Corporate existence starts when the articles of incorporation are filed with the state office that handles incorporations, usually the Secretary of State or Corporation Commissioner, along with the required filing fees. Accelerated incorporations or same day filings are available in some states.
How to Incorporate
If you've sorted through the many types of business structures and decided to create a corporation, you're facing a list of important -- but manageable -- tasks. Here's what you must do:
Choose an available business name that complies with your state's corporation rules.
Appoint the initial directors of your corporation.
File formal paperwork, usually called "articles of incorporation," and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.
Create corporate "bylaws," which lay out the operating rules for your corporation.
Hold the first meeting of the board of directors.
Issue stock certificates to the initial owners (shareholders) of the corporation.
Obtain licenses and permits that may be required for your business.
Should you Incorporate?
You will want to take into account the following:
Your vision regarding the size and nature of your business.
The level of control you wish to have.
The level of "structure" you are willing to deal with.
The business's vulnerability to lawsuits.
Tax implications of the different ownership structures.
Expected profit (or loss) of the business.
Whether or not you need to re-invest earnings into the business.
Your need for access to cash out of the business for yourself.
Advantages and Disadvantages of a Corporation
A corporation, chartered by the state in which it is headquartered, is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed; it can be sued; it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes.
Advantages of a Corporation
Shareholders have limited liability for the corporation's debts or judgments against the corporations.
Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
Corporations can raise additional funds through the sale of stock.
A corporation may deduct the cost of benefits it provides to officers and employees.
Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
A corporation pays 15% federal income tax on taxable income up to $50,000; 25% tax on income from $50,001 - $75,000; 34% tax on income from $75,001 - $100,000; 39% tax on income from $100,001 - $335,000; and 34% tax on income over $335,000.
A sole proprietor who filed a federal income tax return under the status of married, filing jointly, would pay 15% federal income tax on taxable income up to $35,800; 28% tax on income from $35,801 to 86,500; and 31% tax on income over $86,501.
Disadvantages of a Corporation
The process of incorporation requires more time and money than other forms of organization.
Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income, thus this income can be taxed twice.
Federal Tax Forms for Regular or "C" Corporations
Form 1120 or 1120-A: Corporation Income Tax Return