What You Need to Know About Incorporating in 2012

We’ve rolled into 2012 and for entrepreneurs, the new year offers a great opportunity to start a new venture and turn your vision into reality.  

If 2012 will be the year you begin your business, there are a few things you've got to keep in mind in order to make your business official. And the sooner you address the legal matters, the better. 

To help you sort through the legal ins and outs of starting a business, here are some of the top questions new entrepreneurs ask:

Do I need to incorporate my business? 

Many small businesses consider themselves too small to worry about incorporation.  However, whether you're a self-employed PR consultant or wedding planner, incorporating or forming an LLC (Limited Liability Company) can be a smart idea. Here's why:

• Liability protection: The LLC and the Corporation (C Corporation or S Corporation) protect the owner’s personal assets from any liability of the company. This means that if your business is sued or can’t pay its debts, your personal assets are shielded from any judgment. Of course, lawsuits are worst-case scenarios and you most likely won’t run into any trouble. However, if you’re sued as a sole proprietor, you’re sued personally, putting everything from your retirement savings to children’s college fund at risk. And did you know that creditor judgments can last up to 22 years? You need to think about protecting the assets you’ll have down the road as well. 
• Taxes: Federal income tax rates can be lower for corporations than for individuals. And as a corporation, you may be entitled to additional deductions.
• Credibility: Adding "LLC" or "Inc." after your company name boosts your credibility in the eyes of some customers and partners.
• Business credit/capital: As a corporation or LLC, it can be easier for you to access a line of business credit. And forming a C Corporation will be essential if you plan to seek Venture Capital funding. 

Where should I incorporate?

Delaware and Nevada are both popular states for incorporation. Delaware offers some of the most flexible, pro-business statutes in the country, and Nevada offers low filing fees, as well as the lack of state corporate income, franchise, and personal income taxes. However, as a general rule of thumb, if your business will have fewer than five shareholders, it’s best to just incorporate in the state where you actually live or have a physical presence. Otherwise, any benefits of Delaware and Nevada will be erased by all added the fees and paperwork created by operating out of state.

How do I incorporate or form an LLC?

In most cases, you set up an LLC or Corporation with the secretary of state’s office for whichever state you choose as your ‘state of incorporation.’ Here’s a quick overview of the process for both the LLC and Corporation:

Forming an LLC

For an LLC, you’ll need to file Articles of Organization or Certificate of Organization with your state’s secretary of state. While the LLC is less formal, these documents must contain at least the minimum requirements as described by state law before they can be successfully filed (and your LLC processed). 

Forming a Corporation

To form a corporation, you’ll need to take the following steps: 

• Draft “Articles of Incorporation” or “Certificate of Incorporation” 
• The Articles of Incorporation must be executed by a person designated as “incorporator.” The incorporator must be an adult and doesn’t need to be affiliated with the corporation in any way other than merely filing the document. Later, this person will pass a resolution assigning all rights and duties to the board of directors.
• Submit your Articles of Incorporation. In most states, the agency responsible for corporate filings is the Secretary of State (usually the Corporations Division). 
• Once the state office has processed your documents, they will return the certified documents to the address provided.
• Elect a board of directors: The Incorporator executes a corporate resolution electing a board of directors assigning all rights and duties to the board.
• Issue shares: The Board of Directors issues shares to designated shareholders.
• S-Corp: If you want the pass-through tax treatment of an S-Corp, you’ll need to file IRS Form 2553 with the IRS within 75 days of the start date of your corporation. 

When should I incorporate?

Since the main benefit of incorporation is liability protection, the sooner you incorporate or form an LLC, the better. There's simply no reason to wait and potentially expose yourself to any more liability than you need to. With the new calendar year, it's a great time to get your legal structure squared away and your business will be set for years to come. 

Most importantly, the act of incorporation or LLC formation won’t break the bank, particularly if you use an online legal filing service or file the forms yourself. Whatever method you choose, make sure to pat yourself on the back for taking this important step for your business and your finances. Here's to a prosperous and happy 2011!  

By: Nellie Akalp