If you’re looking to start corporation or have been operating as a sole proprietor, you’ve probably been wondering if you should start corporation or form a limited liability company. The answer is yes. There are many advantages to forming an LLC or corporation such as asset protection, tax savings, and limiting your personal liability.
But before you rush to start corporation or LLC, you need to make some important decisions for the future of your business–3 to be exact. After we discuss these important decisions, we’ll show you (step-by-step) how to start a corporation or LLC.
#1. Where to Incorporate or Form an LLC
The first big decision you’ll need to make before you start your own corporation or LLC, is what state you should incorporate or form the LLC in. You may choose to go with the state in which you live in or you may foreign file in a state that offers other advantages. States such as Delaware and Nevada are known for their business friendly laws and are popular among business owners operating in other states.
The cost of forming a corporation or LLC and corporate laws vary from state to state, so do your research on which state has to offer before you commit to one. Some business owners mistakenly think they will save money by incorporating in a state with low fees, even if their company is neither located nor conducts business in that state. These business owners often don’t realize that they will have to pay more to foreign file in the state in order to transact business in their home state.
#2. The Name of Your Business
Before setting up a corporation or LLC you need to come up with a name for your business and make sure it’s available in the state in which you plan to form your entity. The name you choose for your business must be different than the name of any other business entity registered to do business in your state of incorporation.
If you’re not sure if the name is available, many states have an online search tool that allows you to check for similar business names in that state. You may also want to create a list of backup names in case your name is already in use.
In addition to making sure your name is not currently in use, you’ll also want to make sure that you avoid using restricted words in your name. Words such as “bank” and “insurance” or “architect” may be restricted for use in some states. Check for a restricted words list from the state in which you plan to form your business entity.
#3. Official Business Address
The final decision you’ll need to make before you incorporate or form a limited liability company is where your business will be located and what the official business address will be. You’ll need a specific address to put on your articles of incorporation (or articles of organization if you’re forming an LLC) so that the business can receive legal documents, and official state documents.
In most states, your business location can serve as the registered office, and a corporation or anyone aged 18 or over can be the registered agent. However, if you don’t have an office in the state where you incorporate, or if you prefer to have someone else act as agent for you, you can hire a professional registered agent that will receive documents on the behalf of your business.
[BONUS CONTENT] How to Form a Corporation or LLC
Before we dive into how to form a corporation or LLC let’s first break down the differences between the two. Read carefully. Selecting an entity for your business is one of the most important business decisions you’ll ever make, so take your time and choose wisely.
A corporation is a legal entity created separately from those who own and operate it. A corporation’s debts and taxes are separate from its owners, thereby offering the greatest personal liability protection of all business structures. The two most common types of corporations are S and C corporations.
C Corporations: On average, C corporations pay less in tax than an individual. It’s also the only tax table where the tax rate drops when you start making millions. That’s why every Fortune 500 company is a C corporation.
Additionally, there are no limitations on shareholders. They can live anywhere in the world and be of any entity. Even better, C corps boast fewer criteria than S corps giving you the options you need to meet your objectives.
The main disadvantage of this structure is that it pays tax on its earnings and the shareholders’ dividends. This means a double tax on your corporation’s earnings. This may be a deal breaker for some people.
S Corporation: From tax advantages to flexibility, forming an S corp has many benefits. One such benefit is pass-through taxation. This allows owners to avoid the double tax of C corps making it a popular choice for small business owners.
Both S and C corps allow for limited liability of the owners, officers, and directors but while C corps have no limitations on shareholders, S corps cap the number of shareholders at 75.
The corporation requirements for an S corp are stricter than that of a C corp.
The most popular entity structure available, an LLC blends the aspects of corporations, partnerships and sole proprietorships into a simple and flexible business entity. LLCs protect the owners and operators from personal liability similar to a corporation, and they possess the “pass-through” tax benefits of a partnership.
Additionally, LLCs offer the same personal liability protection as corporations, but do not require the typical formalities that are required when managing a corporation.
How to Create a Corporation or LLC in 6 Steps
- Select a state– As we mentioned earlier in this post, you don’t have to form your business in your home state. States like Delaware, Nevada, and Wisconsin come with special advantages you might want to take advantage of, and you don’t have to live there to form your business there.An LLC operating agreement is a legal document that outlines the ownership structure and member roles of your new LLC.
- Name LLC/Corporation-Choose a name and make sure it’s available in the state in which you plan to form your entity.
- Choose Registered Agent- You’re actually required to have a registered agent if your business doesn’t have a physical location in the state in which it’s registered. By having a Registered Agent, you don’t have to worry about having regular business hours or a set business address.
- File LLC/Corporation with State- To officially create an LLC or Corporation, you will need to file your formation document with the state. The most common name for this document is the Articles of Organization (for LLCs) and Articles of Incorporation (for Corporations).An LLC operating agreement is a legal document that outlines the ownership structure and member roles of your new LLC.
- Create Operating Agreement or Bylaws-An LLC operating agreement (or Bylaws if you’re forming a Corporation) is a legal document that outlines the ownership structure and member roles of your new business. Most states don’t require an Operating Agreement/Bylaws, but it’s still a good idea to have one.
- Get an EIN- An Employer Identification Number (EIN) is like a social security number for your LLC. You will need an EIN if you want to hire employees or open business bank accounts.
There you have it! 6 steps on how to open a corporation or LLC!
We understand all this information can be overwhelming, so if you’re still not sure how to make a corporation or LLC, give us a call!
As a full-service corporate formation specialist, Inc Authority, we’ll not only take care of these steps for you, we provide services to help operate your business efficiently. By taking care of things like legal planning, business funding, business planning, marketing and more, you can focus on running your business.
You don’t have to do it alone. Our team of business startup specialists are here to make starting your business a breeze.