Most small businesses start out as sole proprietorships. It's the simplest and most convenient way to get up and running quickly. The problem is that with a sole proprietorship, the owner’s assets and the business's assets are the same, which exposes the owner to considerable risks. Becoming self-incorporated is the best way to minimize your personal liability and protect personal assets in addition to gaining other benefits.
All 50 states allow a business owner to incorporate himself.
The details vary from state to state, but the basic steps are:
- Choose a name: Visit the secretary of state's website and check the database to make sure that the name you want to use is available.
- Decide on a state of incorporation: While you will probably choose your home state as the state to incorporate, other states like Delaware and Nevada offer tax advantages for small-business owners.
- Prepare the articles of incorporation: Prepare the articles of incorporation, which include information about your company, purpose of the business, location and the stock shares you plan to issue.
- Designate a president, director and treasurer: If you are self-employed, you will probably fill all of these positions yourself. Check state requirements for these positions.
- File paperwork with the secretary of state: File the incorporation documents with the secretary of state and pay the required fees.
- Choose a registered agent: The registered agent could be yourself, or you could select a firm to act as your registered agent.
- Hold first meeting: Corporations are required to hold annual meetings, so hold your first meeting and record the minutes.
- Apply for an EIN: Apply for an employer identification number for the new company.
Incorporating yourself has the following benefits:
- Protection of personal assets: A major benefit of incorporating is the protection of personal assets, such as savings accounts and personal vehicles. Creditors of the corporation can only attack the assets of the business, not your personal assets.
- Protection from business liabilities: A corporation separates you personally from business liabilities like lawsuits.
- More credibility: Clients perceive a corporation as being more credible and solid compared a sole proprietorship.
- Better access to capital: You have better access to capital as a corporation than as a sole proprietorship. Lenders are more comfortable making loans to corporations than to individuals because of personal liability issues.
- Possible tax savings: Being incorporated gives you more ways to save on taxes than being taxed as an individual. However, you should discuss your specific tax situation with your accountant to get more exact details on the tax savings you might realize.
Incorporating yourself has several drawbacks:
- Costs more to set up: Preparing the corporate documents can result in expensive legal fees.
- More paperwork: You have to write the articles of incorporation, hold formal shareholder and board meetings, keep accurate minutes of the meetings and file more federal and state tax forms. This could increase your accounting fees.
- Must maintain separate accounts: The corporation must have its own records and bank accounts. You cannot mix business and personal assets.
If you have evaluated the pros and cons of incorporating yourself and have decided to go ahead, you will also need to decide what type of corporation will work best for you. You can choose from a C corporation, an S corporation or an LLC. You should have a discussion with your lawyer and your accountant to determine which entity will work best for you.