30 Dec 4 Things to Know Before Incorporating a Business
4 Things to Know Before Incorporating a Business
Incorporating a business is an important decision that will significantly impact your life in the present and future. It is a critical decision, and you need to consider several factors before moving forward with it. But that’s no reason to take the stress!
Here are four quick things every entrepreneur should know about incorporating a business.
What is incorporation, and what are the benefits of incorporating a business?
Incorporating a business refers to converting your sole proprietorship into a company. A company or corporation is treated as a separate legal entity, allowing owners or partners to separate their finances from their business.
There are several benefits of incorporating a business, and the most prominent ones are mentioned below:
Separation of Assets
Incorporation allows the owners to separate their assets from the company’s assets through limited liability. This provision ensures that any liability the business accrues only applies to the company’s assets, and the owners will not need to pay out of their pockets.
Easier to Raise Credit
Incorporation makes it easier to raise credit because the board can authorize the distribution of shares. By distributing shares, they allow people to buy a stake in the company and use the money for business development and investments.
Companies pay lower taxes compared to sole proprietorships and partnerships. Therefore, incorporating your business will provide tax benefits and may also allow several tax exemptions that do not apply to the other two forms.
Unlimited Shareholders (Owners)
There is no limit to how many shareholders a company can have, making matters convenient for raising capital and similar aspects. However, remember that increasing shareholders by creating new shares dilutes ownership per share.
Hence, the decision will require board approval.
How do you incorporate a business?
Incorporating a business is a six-step process.
- Business Name Selection
- Location Choice
- Entity Type Selection – Limited Liability Company, Corporation
- Tax ID Acquisition
- Money Management – creating dedicated bank accounts for the company
- State Licensing and Permits
Restrictions on who can incorporate a business and where
Most residents and non-residents are allowed to incorporate a company in the US. However, a few industries or business structures prevent non-residents from becoming owners. The best solution is to thoroughly study laws and regulations and work with an experienced expert when incorporating the business.
Technically, there are no restrictions about which state you can incorporate a business in, so long as it follows state laws. Incorporating a company in a different state requires it to abide by both states’ rules.
Cost of incorporating a business and other expenses (legal fees, accounting fees, etc.)
You will need to consider several expenses when incorporating a business. The following are the most common ones you’ll need to pay.
- Governmental Filing Fees – Between $50 and $200
- Fee for Legal Documentation Expert or Attorney
- Registered Agent Fee
- Franchise Fee (if applicable)
- License and Permit Fees
Different states have different fees for these categories, so you will need to determine the fee structures for the state you choose.
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