If you have been operating your enterprise for a while as a sole proprietor, you might find yourself wondering if incorporation would be a beneficial step to take. This article will assist you in making the right decision and help you learn about how to incorporate yourself.
Reasons to Incorporate
Think of this: You established a small business a few years back as a sole proprietorship with only three personnel. Due to your great services, the demand for your business necessitated you to hire more employees, thus you acquired higher debt to purchase more tools and equipments, and the number of your clients skyrocketed.
However, after some time, you began to wonder: What if one day, your business sales slow down and you find yourself swimming in the sea of debt? What if you come across with an unhappy client or a disgruntled employee of your company sues you? Since you are working as a sole proprietor, you are individually and personally accountable for any legal adjustments and bad debts against your company, leaving your residential property and other personal, valuable belongings at risk.
When you become familiar with the process of how to incorporate a business, you will realize that this process is similar to building an entirely separate legal entity, one that will incur and shoulder the complete liability that is burdening you as a sole proprietor.
Through cheap incorporation, you will be permitted to:
- Reward as well as maintain key employees by providing your workers with a portion of the business.
- Get more opportunities to raise funds. Rather than applying for more debt, you can seek equity investors.
- Reallocate tax liability from you to the corporate entity.
- But, also be aware of some setbacks associated in this venture:
- You will have to use more time and money to do incorporation than to establish other kinds of business.
- Corporations are monitored by more regulations at both state and federal level. In addition, the tax policies are more complex.
- The structure of management in a corporation is more complicated, furnishing you, as the business owner, less options and flexibility to operate business processes as you deem necessary.
The Corporate Structure
So how do you incorporate? First and foremost, you should understand that every corporation comes with three-tiered structure consisting of:
- Shareholders – These are considered as linchpins of the corporation. They are the authorities who pick and remove directors, modify bylaws, consent the sale of assets and even dissolve the corporation. It is not necessary for your company to have several shareholders. In actual fact, many states allow one person to keep 100% of the stock of the corporation.
- Directors – These people work and act on behalf of the stockholders, handling the enterprise, coming up with key decisions about the direction of the company, and even electing company officers. Many states authorize corporations to run with single director, but there are some that impose a minimum of three directors.
- Officers – In many states, corporations should run with at least a president, treasurer and secretary. These people will manage the day-to-day operations of the business, though numerous states also permit one person to function with all three positions.
The Incorporation Process
To establish your corporation, you will have to come up with Articles of Incorporation in the state where your business is located. The articles should present the basic information and facts regarding the company, to include its name, business purpose, as well as the number of shares allowed. You will have to file this document with the right state office and compensate the corresponding filing fee, which can amount to several hundreds of dollars. It’s best to familiarize yourself with the IRA tax rules. Furthermore, hiring an attorney will make the incorporation process easier. The state where your enterprise is headquartered will file your business and send you a Certificate of Incorporation accordingly.
Once you received your certificate, you can then accomplish the next steps such as appointing directors and even holding the first meeting of directors in your company. You will have to make bylaws, which provide information on the rights of the company’s officers, directors, and shareholders. Also, you should issue stock. While these tasks don’t need to be broadly-held, they should be distributed to every person who is an owner of corporation.
When learning about how to incorporate in Nevada, you must also understand the LLC taxation policy to discover all the options available. After incorporation, you’ll understand the huge difference in how your company will be treated. Lastly, discovering how to incorporate yourself may award you a pleasant surprise when tax time arrives.