Last Updated: February 16, 2024, 12:56 pm by TRUiC Team

Ways to Incorporate Your Businesses

Choosing to incorporate your businesses can be one of the most beneficial decisions that you can make.

Even though incorporating your business traditionally required a large amount of time and high fees (as a result of needing to hire a specialized attorney), the increase in third-party incorporation services has made this becoming an increasingly accessible option. 

In this guide, we break down how, why, and when you should think about incorporating your business.

Learn everything you need to know about incorporating your small business.

Why Incorporate Your Business?

Advantages of Incorporation

There are many reasons why you may want to incorporate your business, including: 

Increased Funding Options

Obtaining adequate funding can be a real struggle for unincorporated business entities (e.g., sole proprietorships or general partnerships) as many common financiers (including banks) can consider them to be less credible.

Moreover, incorporating your business will mean that you will be considered as a separate legal entity to your company, and consequently, you will be able to register yourself as an employee of your business and enjoy benefits like tax-deductible expenses and a pension. 

Limited Liability Protection

As you will be a separate legal entity to your business, you will be personally shielded from any liability that arises as a result of your company’s debt or conduct. This means that you will not have to risk jeopardizing your personal assets (i.e., your home or vehicle).

While this is by no means an absolute rule (and is subject to any personal guarantees that you make) it is definitely one of the most compelling selling points for why you would want to incorporate your business as a small business owner.

Straightforward Business Ownership Transfers

Passing ownership of an incorporated structure to another shareholder or member is very simple. 

By transferring your shares in a corporation, you will be able to easily sell, transfer, or give away your ownership in the company when and if you decide to move on without having to worry about the several legal complications that can occur when attempting to do this in a General Partnership. 

Perpetual Lifespan

Unlike unincorporated business entity structures, corporations' lifespans are not dependent on their owners. They can continue virtually indefinitely until they stop (e.g., as a result of going insolvent) or until they merge with another business. 

Disadvantages of Incorporation

Though there are many benefits to incorporating your business, there are a few disadvantages:

Tighter Scrutiny

With a corporate structure, you will be subjected to a much higher degree of scrutiny from government bodies like the Internal Revenue Service (IRS). This means you will be required to satisfy certain legal requirements that relate to how you manage and record the day-to-day operations of your business. 

Double Taxation

Since incorporating your business means that you will be separate legal entities, your business will be considered to generate its own profits completely separately from your own.

This means that any profits generated by a corporation are taxed twice. Once at a corporate level (21%), and then a second time at the shareholders’ personal returns (if dividends are distributed). 

There is an exception to this. S corps are both not subject to double taxation — all profit generated is funneled directly to the owners and taxed at their relevant income tax rates. 

Costly and Complex Formation Process

As a small business owner, learning how to incorporate your businesses can be quite challenging and can take up a very large amount of your time that you could spend making important managerial decisions. It is also more expensive than forming a sole proprietorship or a general partnership (especially when considering the lawyer fees that can be involved).

Having said that, the increasing prevalence of incorporation services has meant that business owners can now rely on specialized third-party providers to handle their incorporation process without having to pay exorbitant fees to law firms or tax consultants. 

How Do I Incorporate My Business?

There are three ways through which you can incorporate your businesses.

  1. Hiring a third-party incorporation service to assist you in your company’s incorporation process for a small fee
  2. Hiring a specialized attorney to handle your business’s incorporation process (this is commonly quite expensive.) 
  3. Incorporating independently (this may be more difficult for first-time business owners) 

If you want to handle your incorporation process yourself, check out our state-specific How to Start a Corporation guides for a detailed look at formation and compliance requirements. In general, though, you will want to follow these guidelines:

  • Contact your state’s business services division: They are responsible for the management of businesses’ incorporation processes
  • Determine your state’s required forms, fees, and process timeline: This will ensure you do not make any small (but important) technical mistakes that relate to legal rules which are exclusive to your location.
  • Prepare your formation documents: The exact information on this will depend on your home state. While these are generally handled by incorporation service providers or specialized attorneys, you may be able to fill them out independently. 
  • Draft your bylaws: These act similarly to an LLC operating agreement and should provide detailed information that relates to how your business will be run, how much responsibility each shareholder or owner will have, where (and how often) stakeholder meetings will be held, and how often dividends will be distributed. 
  • Receive approval from the state: Some states will send a Certificate of Incorporation once your corporation is approved.

Which State Should I Incorporate My Business In?

If you are set on incorporating your business, one of the most important decisions that you will have to make is selecting which state you will incorporate in. 

There is no law preventing you from registering in any state (even if you do not operate there), so you are technically free to incorporate in any state or in the District of Columbia.

Having said that, it is generally recommended that you should incorporate your business in your home state. This is because:

  • Incorporating in your home state is usually cheaper and simpler
  • You will not have to hire a registered agent service in more than one state
  • You will not have to pay franchise taxes or file annual reports in more than one state

Keep in mind that incorporated structures are categorized as “foreign corporations” in every state aside from the one they incorporate in. Depending on the state, foreign corporations may be required to obtain a Certificate of Authority. This acts as a certificate that allows them to conduct business in that state. 

The process for obtaining a foreign qualification is generally more expensive than the domestic incorporation process, so business owners on tight budgets should undoubtedly keep this in mind.

Do I Need to Incorporate My Small Business?

Even though you may not necessarily “need” to incorporate your business, doing so can allow you to enjoy certain monetary, financial, and personal benefits that will be very useful regardless of your current size or capital.

The benefits of incorporating a small business are:

  • Increased protection
  • Increased credibility and access to funding
  • The ability to operate across the US
  • The ability to protect your business’s name (subject to state laws)
  • The ability to deduct certain expenses and register yourself as a company employee

Realistically, you should assess the benefits of incorporating your business and consider whether they are “worth” the increased: government scrutiny, costs of operation, and double taxation that you will be subjected to as a result.

Frequently Asked Questions

Both corporations and LLCs offer limited personal liability and increased credibility to their owners. However, they do also have quite distinct advantages and disadvantages. 

Small businesses will likely benefit more from choosing to form an LLC rather than a corporation, as this involves significantly less paperwork and expenses while still maintaining most of the benefits of a corporation.

The true cost of incorporating your business will depend on how you go about incorporating, as well as which state you choose to incorporate in.

If you choose to handle your incorporation process individually, you will only really need to pay the procedure’s government filing fees ($35 to $300 depending on your state) as well as any fees which are paid to your state. 

If you rely on a specialized incorporation service, this can be done for as little as $39 (excluding the aforementioned filing fees). 

If you hire your own attorney, your total expenses can vary significantly but will usually be in the $500 to $1,000 range (depending on your lawyer’s experience and reputation).

When incorporating your business, you must choose a business name that satisfies the statutory requirements of your state’s naming laws. 

While these can vary, there are a few generally accepted principles that apply to the vast majority of states:

  • Your business name must be different from any other existing business in your state to not breach the intellectual property rights of another company
  • Your business name must contain the words “incorporated,” “limited,” “corporation,” “company,” or an abbreviation of those words.
  • You cannot include any words that would suggest that you are a government entity (e.g., FBI.)
  • You may require approval for some institutional words (including bank, university, credit union, etc.)

You will also want to ensure that your chosen name has a “.com” domain and URL availability to avert any complications following your registration.

One of the most common formality requirements which need to be satisfied in order for a business to maintain its incorporated status is to hold annual meetings with its shareholders and board of directors. 

Ideally, you should hold more than one meeting a year even if you are not legally required to do so.

Yes, incorporated businesses are legally required to obtain an Employer Identification Number (EIN) as this is used by federal agencies to identify and record individual businesses. 

You will also need an EIN in order to:

  • File your federal and state taxes
  • Open up a business bank account (this is a legal requirement for incorporated businesses.)
  • Hire employees

In order to obtain an EIN, visit the IRS website to file an application online or download Form SS-4 to submit by mail. This form is free to file.