Incorporating your startup offers a number of important benefits, including providing a strong corporate structure, protecting personal assets, and growing the reputation of your business. With the right processes and resources in place, entrepreneurs can start building a strong foundation for their businesses with the right form of incorporation.
Reasons to incorporate a startup
Incorporating your startup creates a new legal entity that can be used to navigate affairs ranging from ownership shares to taxation, while distinguishing your personal investments from the business. A number of advantages are associated with incorporating a startup, including :
- Strong corporate structure : Having a strong corporate structure will make it easier to protect individual investments and assets separate from business finances.
- Personal asset protection : Your personal assets will not be legally bound to the business in case of financial loss, mistakes, or liabilities.
- Growth potential : Opening up a corporate structure will improve the prospects for growth, by allowing for the possibility of attracting investors or taking on new employees.
- Increased credibility : Legally incorporating a business will make it easier to secure bank loans and grants, as well as provide increased credibility to potential customers.
- Protection of intellectual property : Intellectual property such as trademarks, brand names and designs can be legally protected with a corporate structure.
Forms of incorporation
A startup will need to select an incorporation form in order to ensure that their brand and assets are adequately protected. Different forms of incorporation (including sole proprietorships, limited liability companies (LLCs), corporations and partnerships) all offer distinct advantages and disadvantages, depending on the nature and objectives of the business.
The most common forms of incorporation are sole proprietorships, limited liability companies, corporations and partnerships. Each form has different rules and regulations, which will dictate the ownership, taxation, liabilities and management of the business.
- Sole proprietorships : A single owner sets up the business and keeps control of all the profits, liabilities and losses. This type of business form is the simplest and least regulated.
- Limited liability companies (LLCs) : An LLC is a corporate structure owned by one or more individuals, which offers many of the same advantages as a corporation, but also allows for its members’ taxes and obligations to pass through to them individually.
- Corporations : Corporations are more complicated to set up, and they do require a process of formation, but they also offer the most advantageous levels of asset protection and opportunities for growth and tax savings.
- Partnerships : A partnership involves the joining of two or more people who share the costs, profits and losses of a business. This form of business may also be referred to as a joint-venture.
Deciding on a business structure
When deciding on a business structure, it is important to consider the risk profile of the business, the desired degrees of ownership, control, taxation and asset protection. It’s wise to consult an accountant or attorney to understand the particulars of each form of incorporation, in order to make an informed decision.
Pros and cons of different incorporation forms
The forms of incorporation each present distinct advantages and disadvantages depending on the nature of the business and the desired degree of control, management and taxation. The pros and cons of each form will vary, but considering the following points can help entrepreneurs make an informed decision :
- The complexity and documentation needed to set up an LLC, corporation or partnership.
- The amount of paperwork and resources invested in setting up and maintaining a corporate structure.
- The liabilities and risks associated with each form.
- The involvement of the owners in the running of the business.
- The taxation rules that apply to the particular form of incorporation, and the complexity of filing taxes in that form.
Factors to consider when choosing a structure
When choosing a business structure, it is important for entrepreneurs to ask themselves a few key questions about the business, such as : What is the nature of the business ? What level of ownership and control do the owners desire ? How will the business be managed ? What are the expected tax implications ? Familiarizing oneself with the pros and cons of each form of incorporation will make this decision easier to make.
Legality in terms of state laws and regulations
Incorporating a business requires the proper licensing and registration processes to be undertaken in accordance with the state’s laws and regulations. It is important for entrepreneurs to familiarize themselves with the state's legislation and regulations, in order to ensure that their businesses are set up in a legal and compliant manner.
Applying for an EIN / tax ID number
Once the business structure has been chosen, the next step is to apply for an Employer Identification Number (EIN) or Tax ID number. This number is used by businesses to identify themselves while filing taxes, as well as for other purposes such as obtaining loans, contracts and grants.
How to register for an EIN / tax ID number
To obtain an EIN/Tax ID number, either through the IRS website or by contacting its Business & Specialty Tax Line. The EIN/Tax ID number should also be registered with the state in which the business will be doing business, as well as with any other agencies or organizations to which the business may need to apply.
Filing business taxes based on the chosen structure
After a business is incorporated, business taxes will need to be filed according to the chosen corporate structure. Different methods of taxation are applicable to each form of incorporation (sole proprietorships, LLCs, corporations and partnerships) and it is essential to make sure that the company's taxes are filed appropriately in order to avoid penalties from the IRS.
Incorporating a startup offers entrepreneurs a range of advantages, including asset protection, strong corporate structure, growth potential and enhanced credibility. Different forms of incorporation (sole proprietorships, LLCs, corporations and partnerships) offer different ownership, taxation, liabilities and management rules. The most suitable form of incorporation must be chosen according to the nature and objectives of the business, and EIN/Tax ID numbers will need to be obtained in order to file business taxes.It is also important to consider the state-specific laws and regulations when incorporating a business.