What is Incorporation?

What is Incorporation?
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Starting your own business is an exciting event. You may decide to start a home-based business, a franchise, an online business, or be an independent contractor. Whether you’re an entrepreneur or a startup, incorporating your business is the best way to establish a professional identity. Along with providing credibility to your customers and clients, it also has financial benefits, separating your personal taxes and assets.

Incorporation is a legal process that can either be done by yourself or with the help of a lawyer or professional company with incorporation expertise. Along with there being multiple types of incorporation options, the process and fees differ from state to state.

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There are multiple options for business incorporation, and each one has its advantages and disadvantages based on your business.

There are multiple options for business incorporation, and each one has its advantages and disadvantages based on your business. There is:

  • Sole Proprietorship: A Sole Proprietorship does not require any incorporation filing, as you are the sole owner of the business. You may still need a business license or permit, depending on the industry and the location. Your business and personal taxed would be one in the same, but you can also be held liable in the event of legal action.
  • Limited Liability Company: A Limited Liability Company (LLC) is a popular business structure because of the limited personal liability and there’s less paperwork involved. You can be the owner and only person working for the business, or you can hire employees. LLC rules vary from state to state, so you’ll need to check with your local government.
  • Cooperative: A cooperative business structure is most common in industries like healthcare, retail, and restaurants. Profits and earnings are distributed to user-owners, and you can receive funding from government grant programs. However, it requires all members to be active in order to be successful.
  • Corporation: A corporation, or C Corporation, is owned by shareholders. They are privately owned companies, but they have the option to “go public” with an initial public offering (IPO) in order to sell ownership shares in the stock market. While there are great benefits to a C Corporation, it is also time consuming and expensive to structure.
  • S Corporation: An S Corporation is similar to a C Corporation, but it’s taxed differently by the IRS. There are shareholders and possible tax savings, but shareholders must be compensated and their operational guidelines are strict.

Each structure has different legal and tax obligations based on where you incorporate and how many people will be in charge of running your business.

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In order to incorporate, you will need a business name. Your business name must be registered with the state and/or local government. Your business may also need federal and state licenses and permits in order to operate legally depending on what state you’re in. You are not a legal corporation until you have filed a certificate of incorporation. Every incorporated business also needs an Employer Identification Number (EIN), which is like your business’ social security number. In order to get one, you must apply with the Internal Revenue Service (IRS).

Filing for incorporation is not a difficult process, but it can be a lengthy one. You have paperwork to fill out and submit, and you have to wait to hear back from the government. Some business structures are a little more complicated based on where you choose to incorporate, but there is plenty of help available.

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