How to incorporate a business in 6 easy steps

Incorporating yourself by setting up your business as a corporation is a popular business strategy that offers personal asset protection, tax savings and enhanced credibility. If you’re a solo entrepreneur, freelancer or small business owner, consider taking this step to improve your business prospects and financial security.

Before making the leap, it’s important to understand the process of incorporating. It involves choosing the right business structure, filing the required paperwork and managing ongoing legal and tax requirements. While daunting at first, the benefits of incorporating yourself are certainly worth considering and can help pave the way for a more successful and secure business.

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What does incorporating yourself mean?

Incorporating yourself means setting up your business as a separate legal entity called a corporation. By doing this, you can create a clear distinction between your personal affairs and your business operations.

When you incorporate yourself, your business gets its own name, tax ID number and legal status. There are different types of business structures to choose from when incorporating, such as:

• C corporation: This is the default corporation status with unlimited shareholders but double taxation and formation fees.
• S corporation: An S corp is a corporation that operates as a pass-through entity, has less than 100 shareholders and can issue one type of stock. You must file with the IRS for S corp status.
• Benefit or B corp: These are mission and profit-driven corporations that are taxed the same as C corps or S corps, depending on the election, but have specific annual reporting requirements.
• Close corporation: These are similar to B corps but for smaller companies with less corporate structure. Most states do not allow public trading of close corporations.
• Nonprofit corporation: This structure is for specific types of public work organizations that can receive tax-exempt status from the IRS. There are rules governing how profits may be used.

Each type of corporation has benefits and drawbacks, depending on your specific business situation and goals. It’s essential to research and understand which structure will work best for your needs and whether incorporating is the right move for you.

Requirements to incorporate

Incorporating yourself involves filing several forms and applications with your state and the federal government to recognize your corporation. It is crucial to follow the appropriate requirements to incorporate your business to avoid legal or tax problems down the line.

You may need to file additional forms depending on the type of corporation you are forming. If you’re aiming to start an S corp, you must file form 2553 with the IRS. Non-profit corporations will need to apply for tax exemption under IRS 501(c)(3). All corporations are required to file annual tax returns, with the exception of certain small tax-exempt organizations that may instead file annual electronic notices and S corps, which are pass-through entities.

Since corporations are separate entities that can be taxed and hold debt, you’ll need to obtain a tax ID number from the IRS. This number, also known as an employer identification number (EIN), is crucial for tax and administrative purposes, such as hiring employees, opening a business bank account and applying for business licenses.

Besides federal filings, you must also register with state agencies where you plan to conduct business activities. You’ll need to prepare the appropriate paperwork to file with your state, including articles of incorporation and corporate bylaws. It is also important to determine the number of shareholders and types of stock you will issue.

Finally, you’ll need to obtain business licenses and permits to operate legally. These may include a general business license, industry-specific licenses and health or safety permits.

6 steps to incorporate yourself

1. Select a business name

First, you’ll need to choose a unique business name that represents your corporation and its purpose. Ensure the name is not already used by another company in your state. Conduct a name search through your state’s business registration office to confirm availability.

2. Identify your state’s requirements

You must register with every state where your corporation conducts business activities. State requirements, such as fees, necessary forms and submission procedures, will vary from state to state. You can obtain all the required information from each state’s secretary of state website.

3. Choose a registered agent

All businesses must choose a registered agent to receive legal and tax documents on the business’s behalf. Requirements around who can serve as a registered agent varies by state. However, you can generally appoint someone internally or hire one. Many businesses choose to hire a registered agent to offload the often burdensome requirements of fulfilling the role internally. 

4. File an articles of incorporation form

Once you’ve determined your state’s requirements, file an articles of incorporation form with your state. This document will include essential information about your company, such as its name, business address, registered agent and desired stock structure.

5. Create corporate bylaws

After filing your articles of incorporation, draft corporate bylaws. These are the rules and regulations that will govern your company’s operations. Bylaws include details about meetings, officers and your board of directors. You can get free bylaws templates from certain LLC formation companies such as Northwest Registered Agent or Rocket Lawyer.

Your bylaws should be tailored to your specific company and comply with both federal and state laws. Although they may not be required to be submitted to your state government, they are useful for company management and limiting legal liability. As a legally binding document, we encourage you to seek legal counsel while finalizing this document. Business formation companies such as LegalZoom and Rocket Lawyer have legal counsel on staff to help.

6. Issue shares of stock

Lastly, issue shares of stock to the company’s owners or shareholders. The stock represents ownership interest in your corporation. In your articles of incorporation, you designated the total number of authorized shares available to issue. Distribute this number of shares among the owners based on their contribution to the company along with a bill of sale. Keep a record of the shares issued to maintain accurate corporate records. Many business formation companies such as Northwest Registered Agent offer free templates for bills of sale.

Advantages of incorporating

Limited liability protection

When you incorporate your business, you are creating a separate legal entity. This means that your personal assets are protected from any debts or liabilities incurred by the company. So, if your company faces financial troubles or legal issues, your personal belongings, like your home and savings, are safe.

Tax advantages

Incorporating your business can provide you with several tax benefits. For instance, depending on the type of incorporation, you could have a lower corporate tax rate compared to a sole proprietorship or partnership.

Moreover, corporations have access to a range of deductions, credits and other tax-saving strategies that are not available to unincorporated businesses. By incorporating, you can potentially reduce your overall tax burden, which may lead to increased profits and financial flexibility.

Easier access to capital

An incorporated business typically has an easier time raising capital than an unincorporated one. Since a corporation can issue shares of stock, you can attract investors and generate funds for your projects or expansions.

Additionally, financial institutions are generally more willing to lend money to incorporated businesses, as they are perceived to have a lower risk profile due to their legal structure and limited liability.

Disadvantages of incorporating

Associated costs

Incorporating yourself can be expensive. When you establish a corporation, there are fees involved in setting up and maintaining your company structure. Additionally, you might need professional assistance from attorneys or accountants, which adds to the overall cost. It’s important to consider your budget and weigh the benefits against the expenses that come with incorporating yourself.

Paperwork and legal planning

Even after you incorporate, you must comply with additional paperwork requirements. This can include drafting corporate bylaws, creating and maintaining minutes from board meetings and keeping records of shareholders.

It might feel overwhelming, especially if you’re used to running a simpler business structure like a sole proprietorship. If you aren’t comfortable handling these tasks, hiring professionals to assist you can add up in cost and time.

Potential tax complexities

While there are tax benefits to incorporating, there are also potential tax complexities, such as double taxation. Corporations must pay taxes on their profits, and when those profits are distributed to shareholders as dividends, they are taxed again at the individual level. You must also understand and navigate the rules around corporate taxes, which might require assistance from a tax professional.

Featured registered agent service offers

ZenBusiness

Learn More

Via ZenBusiness’ website

Cost

$199 annually

Same-day document delivery

No

Phone support

Yes

LegalZoom

Learn More

Via LegalZoom’s website

Cost

$199

Same-day document delivery

No

Phone support

Yes

Northwest Registered Agent

Learn More

Via Northwest Registered Agent’s website

Cost

$125

Same-day document delivery

Yes

Phone support

Yes

Frequently asked questions (FAQs)