How to start your business? Incorporation. What it is.


In our firm we deal with a lot of clients that are trying their hand at the American dream. Sometimes they go ahead and do a number of things to advance their business projects, such as create products, come up with brand names, sign contracts, etc. Some may have been operating their business for years. Then they hear about incorporating their business and come to ask us what they should do and why.
In a nutshell incorporation is the process of registering a business. This is typically done with your local Secretary of State or similar department in your state. Business law and incorporations are in general the domain of state law. Incorporation creates an entity separate from yourself. One of the big advantages is the limitation in liability if proper business protocols are followed. It means that if something goes wrong in the business, for the most part you are not personal liable, and the amount of your loss is the investment you made in the company. Think of buying a stock (Enron for example) and it goes bankrupt owing money to people. As a shareholder, you lose the money used to buy the stock, but you are not liable for the debt of the company.
Corporations have been around for centuries, but the limitation in liability started in England in the 19th century. There are different forms of corporations, the most common is the standard Inc. or Corp. It typically requires a good deal of formalities, and allows for a substantial number of shareholders, with stock that can be sold, transferred, traded, etc. In the United States in the 1960s and 1970s a new type of form appeared, the Limited Liability Corporation or LLC. LLCs are more suited for small businesses, single or a few owners (husband/wife, siblings, family, friends, etc.). The federal and state governments can treat the LLC as an extension of the owners for tax purposes, while maintaining the liability limitation benefits. Many young companies start as an LLC, and if investors require to incorporate in a different manner (S or C corp.) they can do that at a later time.
A few things to keep in mind is that if you acquire any assets, debts or obligations (contracts, agreements) you should have them under your corporation to be able to claim the liability protection. If you have them under your name, you need to transfer them to the new entity or the limitation in liability can be lost. Depending on the nature of the contracts and agreements you have,  you may need to either ask permission for the transfer or start with a new contract.
There are a few simple steps that need to be done to incorporate. First is to file the proper documents with the state agency. Many states require LLCs to go through a publication process, and it can be cumbersome and expensive (like in New York City). There may also be some local formalities that require applying for special permits depending on the type of business you are doing. And do not forget Uncle Sam, your new entity needs a tax identify. Fortunately, the IRS makes it easy, and for the most part can be done in minutes online.
Finally, what state to incorporate is also brought up. Many people have heard about Delaware, but in general, unless somebody has a strong reason (investors, directors or shareholders’ requirements), it is better to incorporate in your local state. 

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