Business Incorporation

One could say that in the initial stages there is no business without owners. However, when you opt for business incorporation, you create a separate legal entity separate from its owners. Post-incorporation, the entity or company comes with more rights and responsibilities. But what exactly does an incorporated business look like? And how can you incorporate your business? Read on to find out.

Introduction to Business Incorporation

Incorporating a business can be the pivotal step towards achieving your next business goals. If you are a business owner or a startup founder wondering how to incorporate a business, let us take you through the entire process in detail.

What is Business Incorporation?

Business incorporation is how you create a legal entity, which is separated from its owners. When a business is incorporated, it means that it has become a legal entity with its own legal identity, powers, and duties.

Why Incorporate Your Business?

Deciding whether to incorporate your business is a crucial decision. Owners must realize that business incorporation makes an informal business arrangement into an entity which can be owned, sold, and borrowed. An incorporated business reduces for all parties involved.

Benefits of Incorporating a Business

There are a multitude of benefits to business incorporation. An incorporated business is a legal entity and hence is a better option if you want to share ownership, hire employees, or recruit co-founders.

• Legal Protection and Liability 

Incorporation protects your personal assets from business liabilities. As a separate legal entity, your corporation is responsible for its debts and obligations. This limited liability shields your personal finances and allows for more risks.

• Tax Advantages

Depending on the type of corporation you choose, you may enjoy tax benefits. When you scale your business up, this tax reduction can save you a lot of money.

(Willing to do business in the US but confused about the import duty taxes? Check out our free and accurate import duty calculator.)

• Increased Credibility 

Incorporation can enhance your business’s credibility and reputation. People think of you as someone who is serious about the products and services you offer.

Types of Business Entities

Choosing the right business structure is essential. There are five main types of business entities. They are: sole proprietorship, Limited Liability Companies (LLCs), Corporations, partnerships and non-profits. In this section, we will try to gain some clarity on the differences between the first three.

With sole proprietorship, there is no differentiation between the entity and the owners. LLCs, on the other hand, offer some liability protection by separating the income of the business from the owner(s). In comparison, corporations offer much more protection to share owners. There are two types of corporations—C corporations and S corporations. Incorporation primarily concerns the LLC and corporation type of entities.

Here is a table to help you know the difference between the two types of corporation and LLCs:

Choosing the Right Entity for Your Business

Selecting the appropriate business entity depends on various factors, including business size, ownership structure, tax implications, and liability concerns. Consulting with a legal or tax professional can provide valuable guidance. 

Key Considerations Before Incorporating

We advise you to always seek professional advice from lawyers and accountants about when to incorporate. Need assistance? Let Commenda’s lawyers and accountants handle the legal matters of your business. Book a demo now!

When Should You Incorporate?

Incorporating too early can be costly, while delaying it may expose you to unnecessary risks. It is advisable to incorporate before taking major business decisions like hiring employees, sharing ownership, taking investments, etc. Here are some key factors to consider:

• Growth Potential

If you are planning to grow and expand in the future, then incorporating is helpful as it gives a proper framework to the business. Because if you don’t, with rising revenues, you may be exposed to these legal and financial risks.

• Investment Needs

If you want to look for investors, it is advisable to incorporate. Investors are more willing to support established legal entities. As a corporation, it is also easier to obtain loans from the banks.

• Ownership Structure

If you have partners today or expect to attract more investors in the future, incorporation can bring order to ownership and control. Incorporation can also help to make a change of ownership or management succession planning smooth.

Steps to Incorporate Your Business

Incorporating a business is a complex process. There are many formalities involved which vary in their relevance. The following are the decisions and actions a business owner should take to incorporate.

Step 1: Choose Your Business Name

Choose a catchy business name from those available. A general rule of thumb is to pick a name people can easily relate to your business type. Consult your state’s Secretary of State on the web to check name availability. Consider filing a name reservation to prevent others from using it during the incorporation.

Step 2: Select a Registered Agent

Choose an individual or company resident in your state to receive legal and official papers for your corporation. A registered agent could be a lawyer, a director, officer, or an employee of the business. You can also hire a registered agent service for some fee. A registered agent can accept legal notices and forward them to the company.

Step 3: Prepare and File Articles of Incorporation

Gather the necessary information for your articles of incorporation, which contains your business name, purpose, structure, and registered agent. Complete the required forms provided by your state’s Secretary of State and submit them along with the filing fees. Each state has its own filing requirements for the articles of incorporation. You could think of using an online incorporation service to help you in this process.

Step 4: Draft Corporate Bylaws

Create bylaws that outline your corporation’s internal governance, including shareholder rights, board meetings, and other operational procedures. Your bylaws must reflect your business structure and goals. Always maintain a copy of your bylaws with your corporate records.

Step 5: Hold the Initial Board Meeting

Conduct a board meeting to formally adopt the articles of incorporation and bylaws, elect officers, and authorize the issuance of stock. Document the proceedings in detailed minutes. Address any administrative matters, such as opening a corporate bank account or obtaining necessary permits.

Step 6: Obtain Necessary Licenses and Permits

Consult your local state and federal laws for the permits and licenses needed in your business to remain compliant. Obtain any necessary licenses and permits and make sure the company continues to meet requirements of the state.

Step 7: Register for State and Federal Taxes

Apply for an Employer Identification Number (EIN) from the IRS, which is essential for federal tax identification. Next, register for state taxes that may include corporate income tax, sales tax, and payroll taxes if you plan to hire employees. Certain states also require corporations to pay franchise taxes. 

And that’s it! You have successfully incorporated your business. If all of this looks too much at one go, do not worry. Get on a one-on-one call with Commenda’s experts and get your business incorporated in easy mode!

Common Mistakes to Avoid When Incorporating

To ensure a smooth incorporation process, be aware of common pitfalls:

1. Overlooking State-Specific Requirements

Every state in the USA has its incorporation laws and regulations. Not obeying these may have legal consequences or result in fines. Ensure that you incorporate your business in the correct manner that complies with the law. Want to stay 100% compliant? Get in touch with Commenda’s team of tax experts!

2. Misclassifying Your Business Entity

The kind of business entity you choose could have severe ramifications relating to taxation, legal responsibility, and functionality. Choose the most suitable entity considering business structure, intent, and potential future development needs. It is advisable to consult a legal or a tax professional who will help you make the right decision.

Converting to a Corporation

After going through the process of registering your business, let’s now see what it takes if you wish to change your business entity to a corporation.

To convert from a sole proprietorship or partnership to a corporation:

1. Dissolve Your Existing Entity: If you have been using a DBA (doing business as) name, you’ll need to dissolve it.
2. Switch Paperwork and Accounts: Transfer all relevant paperwork and accounts to your new corporation’s name.
3. Obtain a New EIN: Sole proprietorships and partnerships will need to obtain a new Employer Identification Number (EIN) for the corporation.

Converting from an LLC to a corporation is a more complex process and we highly recommend consulting a lawyer. It is due to the fundamental changes in ownership structure.  

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Here are the three main methods for converting an LLC to a corporation:

1. Statutory Conversion: This is the easiest method, involving approval from all LLC members and filing a certificate of conversion with the state.
2. Statutory Merger: Form a new corporation and exchange LLC membership rights for shares of stock. This requires formally dissolving the LLC.
3. Nonstatutory Conversion: Form a new corporation and draft legal agreements to transfer LLC membership rights, debts, and liabilities to the corporation.

Remember that incorporation and conversion processes can vary by state. Be aware of local requirements and consult with a business lawyer or your Secretary of State office for specific guidance.

Post-Incorporation Requirements

The journey doesn’t just end after incorporation. There are certain things which you ought to follow after your business is finally incorporated.

1. Maintaining Corporate Records

Documentation is very critical in ensuring compliance with legal and other regulatory requirements within the organization. Record all the board of directors’ meetings and shareholders’ meetings. Keep records of any financial transactions and legal documents. Most importantly, ensure your records are well ordered.

2. Filing Annual Reports and Taxes

Annual filing of reports and tax is another responsibility that comes with incorporation. File necessary documents with your state’s Secretary of State or similar authority. Meet all federal and state income tax requirements, and any other payroll or sales taxes that may apply. Pay attention to deadlines to avoid penalties as well as interest.

Conclusion

Commenda knows that it can be cumbersome to manage your business while working on its incorporation. That’s why we make it possible for you to take the backseat and while Commenda does the heavy-lifting for you! Trusted by 250+ startups and MNCs, Commenda lets you incorporate a new entity from anywhere in the world. Commenda’s lawyers, sales experts and tax accountants are ever ready to smoothen the transition for you. So request a demo NOW!

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