The Top 5 Things To Know About Incorporating a Business

For any new business, deciding to incorporate is typically the first big legal decision. It can be a confusing (and sometimes stressful) question for the new entrepreneur and small business owner. If you need to help your clients incorporate a new or existing business, here are five important things to know:

1. Why Incorporate

Your clients, particularly solo entrepreneurs, might be wondering why they need to incorporate (or form an LLC) in the first place. In most cases, they’ll be motivated by the potential to save money on their taxes – for example to lower their self employment taxes.

However, the most important reason to incorporate or form an LLC is to put some separation between the business and business owner. Your clients need to understand that if their sole proprietorship business is sued, can’t pay its debts or meet its obligations, their own personal assets will be on the hook. Incorporating or forming an LLC shields the business owner’s assets in many situations.

[Read Nellie’s article: 6 Legal Must-Dos After Incorporating a Business.]

2. Which business structure to choose

Choosing the right business structure is usually the trickiest part of incorporating. We can’t cover all the nuances of each business structure here, but generally speaking the two most popular types of legal business entities are the Limited Liability Company (LLC) and the corporation.

The LLC offers personal liability protection, without a lot of the formalities of a corporation. With an LLC, you don’t need to appoint a board of directors, hold an annual shareholder’s meeting, etc. This can be a great choice for small and solo business owners who want to keep their paperwork and administrative requirements to a minimum. A corporation structure is necessary for those companies that want to seek equity-based funding or provide stock incentives for their employees.

3. Where to Incorporate

Maybe your clients see other companies incorporating in Delaware. Or they’re attracted to the state income tax policies of Wyoming or South Dakota. Incorporating in these states can make a lot of sense for some businesses. However, my typical advice is that if you have a small business (less than five shareholders), it is generally best to form your business in whatever state you live in or operate your business from.

Why? A business is subject to the tax laws and corporate maintenance requirements for whichever states it operates in. If your business is located in California and operates there, you’re going to need to pay state taxes to California. Incorporating in another state won’t change this. In fact, when you incorporate in one state and operate in another, you’ll need to register as a foreign entity in the new state. And, this typically adds complications with two sets of annual report filings and fees.

4. When to Incorporate

As you know, changing your business structure mid-year typically means you’ll be doubling your business tax paperwork. For example, you’ll need to file for the time you operated as a sole proprietor, as well as for the time you operated as an LLC/corporation. For this reason, the simplest time to change your business structure is at the beginning of the year. Some legal filing services let you submit your incorporation paperwork now, and then they’ll fast track the application for the first business day in January.

Keep in mind that if your client is incorporating because they’re concerned about personal liability, then it’s best to submit the paperwork as soon as possible. In this case, there’s no reason to wait.

5. How to Incorporate

As a CPA, you can offer your clients incorporation services by partnering with an online legal filing service. This allows you to keep formation costs down for your clients, while still ensuring their paperwork is done correctly and will be processed smoothly. An online service can provide expertise on the formation process, but isn’t allowed to provide specific legal advice on your client’s situation. If your clients are dealing with millions in startup capital or have particularly complex stock requirements, then you should enlist the help of an attorney.

No matter which method you choose, it’s important to stress to your clients that incorporating is easy, affordable, and an essential step to laying a solid legal foundation for their business.