Reading time 7 minutes
Have you been thinking about incorporating your business? Let me tell you, the actual process of incorporating a business – even a freelance business – is not as complicated as you may think. The heavy lifting is going to be deciding is incorporating is the right business structure for you.
You’ve been doing business in your market and you have already established there is a demand for the product or service you provide. It’s time to formalize your business by forming a legal company. As small business owners, most of us will choose to structure our businesses as either a limited liability company (you can read our guide for forming an LLC by clicking here) or a for-profit corporation. So that’s where we’re going to start.
As plainly as possible, I’m going to tell you what for-profit corporations (C-corporations) are, how they work and the possible advantages and disadvantages of choosing to incorporate your business.
What’s a corporation, really?
A corporation is a group of people or companies legally authorized to act as a single entity. Thanks to recent laws, a corporation is recognized by the U.S. government as a person with rights just like you and me. That means a corporation can enter into contracts, lobby the government for certain rights, sue someone or be sued by someone, or loan and borrow money.
Because a corporation is as an entity all its own, it is separate and distinct from its owners (called shareholders). A corporation can acquire its own assets as well as its own liabilities. It can have its own credit and its own debt, its own cash flow and its own bankruptcy, completely separate from the shareholders who own the corporation. Corporations provide its owners with liability protection, meaning if someone should sue your corporation, they cannot come after your personal assets to pay the debt. They can only sue the corporation.
Filing the Articles of Incorporation with Your State
Corporations are formed at the state level. For a modest fee (ranging anywhere from $50 to a few hundred dollars), you can complete and submit the Articles of Incorporation to the Secretary of State where you live. You can usually do this right online or by fax and get a decision from your state in hours or days.
States will typically require the following information from you when you file to incorporate a business:
- The name of your corporation. Your company will need a name that is unique within your state. You can usually conduct a quick name search right online using an entity search function on your state’s Secretary of State website. This will help you to quickly determine if someone else is actively doing business in your state using your proposed company name. Once you choose your name, you legally must include one of the following suffixes at the end of your chosen business name: Corporation, Company, Corp., or Co.
- The legal names and addresses of the shareholders. States require you to submit physical addresses (not PO Boxes) for each person or company involved in incorporating the business.
- The number of shares that will be available at the time of incorporation. States allow you to determined up front how many shares of your corporation will be available for ownership. At the most basic level, you can start off by offering anywhere from 1 to 100 shares. In some states, making more than 100 shares of your corporation available incurs an additional (though not really significant) filing fee.
- A brief description of the type of business in which your corporation will be engaged. Most states provide fill-in forms that only require you to submit basic information, so you probably won’t have to provide heaps of info about your day-to-day activities. In fact, your state has probably already filled this section out, or at the very least provided the verbiage in the instructions for you to write in.
- The name and address of the corporation’s registered agent. The State wants to know who your company’s go-to person is. That person or business is called the Registered Agent (RA). The most important job your Registered Agent has is making sure the decision makers receive (and remit) correspondence, forms, documentation and tax information from the State Monday through Friday from 8AM to 6PM. The RA is also the person to whom the courts will send Service of Process for a summons in the event your corporation is involved in a lawsuit. Your RA has to be in m.the state of incorporation and must have a physical address.
- Bylaws. Though often overlooked and under-valued, your bylaws are the most important governing document your business has. Whether or not you register as a corporation, you should have bylaws. If you file as a corporation, you must have them. Your company’s bylaws are the legally-binding document that serve as written record of how shareholders and managers will run the business – how decisions will be made, what types of decisions can be made by manager versus those made by shareholders, who does what in the day-to-day business operations, how they will do it and what happens when they do or don’t comply. Whereas your Articles of Incorporation establish your business as a legal entity, your bylaws help keep things running smoothly from day to day.
Corporations at the Federal Level
At the state level, a C-corporation is a way of structuring your business. At the Federal level, a C-corporation is a tax designation. A corporation is one of several types of entities for which our Federal government has specific tax regulations. Corporations pay their own taxes, separate from the taxes its owners must pay. That means once a year a corporation will have to file an annual income tax return using Form 1120, not Form 1040 as you will have to do. If your corporation has employees, you will also be responsible for filing Form 941 Employer’s Quarterly Federal Tax Return.
According to the IRS, “The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed.” This double-whammy when it comes to paying taxes (being taxed at the corporate level AND the individual level – is what often makes SMEs choose to form LLCs instead of corporations). Corporations can’t deduct the money they pay out to shareholders and shareholders can deduct any loss of the corporation.
Is a Corporation the Right Business Structure for Your Home-Based Business?
Now that you know and hopefully understand the basics, let’s talk about how this information impacts you by reviewing the a few of the key issues freelancers, contractors, and home-based business owners use to decide whether a corporation is the right business structure for their companies.
Liability protection. Corporations offer you liability protection. Corporations protect its owners against liabilities incurred by the corporation, in most cases. As such, individual owners and shareholders won’t be held liable for the debts, responsibilities and actions of the corporation (there are exceptions to this). That means if someone sues your corporation, they cannot take your personal assets to cover the judgment if the corporation doesn’t have the cash or assets to pay.
Double taxation. The government taxes Corporations separately from its owners, resulting in what is called “double taxation” on a single income source. If you choose to incorporate your home-based business, you will pay annual income taxes on all profits generated by your corporation. Then you will have to pay income taxes on the money (either dividends or wages) you were paid by your corporation.
Independence. A corporation can act independently from its owners and exist long after its owner(s) has left the corporation.
Regular meetings and record keeping. Corporations are required by law to hold regular meetings at least once per year, often times more frequently. The frequency that your corporation will hold its regular shareholder meetings is a detail that has to be outlined in your bylaws. You are required by law to keep minutes of your regular meetings and to provide public notice of the date, time and place of your regular meetings to shareholders no less than 10 days in advance of the meeting. You also have to record minutes for the decisions made during the meeting, the votes received for any given move and the . file annual reports and to have shareholder meetings at least once a year. These minutes from these meetings must be kept on-hand and readily available.
I’m going to stop here to give you the chance to ruminate on what we know so far. Don’t be shy about doing more research. And more important, do research on how corporations are formed in your state.