In the United States alone, there are over 28 million small businesses. Over 543,000 new businesses are being formed each and every single month. In fact, this statistic, which, by the way, dates way back to a 2012 U.S. Census Bureau report, doesn’t even cover so-called solopreneurs who go it on their own by filing a DBA, even before officially incorporating their business.
In fact, the very bedrock of America’s economy comes from small businesses. They’re buzzing hives of productivity, pursuing the American Dream no matter what the cost. However, while so many have decided to go into business for themselves, there are others out there wondering just what it takes, not only to build a business, but also to start and incorporate one.
The truth is that it’s easy to start a business. It’s straightforward to incorporate that business online. Thanks to the conveniences afforded to us by the internet, nearly anyone in the United States (and other countries) can quickly and simply incorporate their business online with just a few clicks.
Today, there are countless companies looking to help you take the legal steps to getting your business off the ground. Still, some are more reputable than others. Some, like the Company Corporation, have been helping small business owners incorporate their businesses online since 1899, while other, newcomers, such as Legal Zoom, are a product of the online revolution that has swept us in bytes and bits over the course of the past couple of decades.
Who you decide to use to incorporate your business online is entirely a personal choice. However, there are some considerations that you need to take into account here. And as someone who has been building successful businesses for quite some time now, I’m going to give you a complete firsthand guide here on what you need to know before incorporating your business and what specific steps you need to take to do just that.
Questions To Ask Yourself Before Incorporating
If you’ve been contemplating going into business for yourself, clearly you’re not alone. Yet, while considering to join the entrepreneurial fray, there are several questions that you need to ask yourself. If you’re living here in the United States, for instance, how you incorporate your business will have a monumental affect on your tax liability.
Now, just as a foreword here, I’m not a lawyer. I’m not an accountant. I’m simply an entrepreneur and I would suggest that you vet any of the advice that you read here with your attorney or tax representative. The truth is that every individual’s situation is unique and tax profiles can widely vary based on things like state of residence, type of goods or services sold, legal structure of the business and so on.
This information should solely be used for the purposes of providing a framework for incorporating your business. Nothing more and nothing less. But I can tell you that I’ve learned a lot over the years, failed and made many mistakes. At the time, those mistakes and failures didn’t feel so good. But looking back at them now, they were blessings in disguise.
There’s nothing better than firsthand experience when doing something like starting or incorporating any type of business. Through trial and error, you learn far more than you do by simply reading about things. So, I would suggest that you take some action. Don’t be afraid to fail or figure things out. You have to learn the ropes somehow.
In the meantime, here are some questions you need to consider before incorporating your business online:
#1 — What’s your state of residence?
Where you live has a big affect on your company’s taxes. Depending on your state of residence, you could be paying a hefty amount of taxes, or you might be skimming by with no state or local tax obligation whatsoever. Clearly, the state that you incorporate your business in could make a monumental difference in your state income tax obligation.
However, you need to consult with your lawyer or tax advisor, because you might not be able to incorporate your business in a state where you don’t legally reside (i.e. spend more than 50% of your time, have a primary residence and other significant family and economic ties, for example). It really all depends on your personal tax situation and prospective type of business you’re looking to start. Will you be selling physical goods or will you be peddling digital merchandise, for example?
The following graphic, which was created by Tax Foundation, provides a handy resource for the combined state and local tax rates. As you’ll notice, the darker the shade of blue into purple, the higher the combined state and local taxes are. States that are greyed out such as New Hampshire, Oregon, Montana and Delaware offer up no state and local sales taxes, while states like California and Tennessee are incredibly high.
#2 — What type of products or services will you be selling?
Clearly, before going into business for yourself, you need to decide what you’ll be selling. Will you be selling physical products that you produce or make, or even drop shipping products from another provider such as running a Fulfilled-by-Amazon Business (FBA)? Or, will you be selling digital goods such as downloadable courses or any other kind of informational product delivered electronically?
What you decide to sell might have an impact on the type of corporation you decide to setup. Digital businesses can flourish in states that have little to no state and local sales taxes. Other businesses that manufacture physical products or employ a great number of employees in certain fields might receive ancillary tax benefits in other states. For that reason, it’s best to do your due diligence before incorporating.
#3 — What type of business entity will you form?
One very important consideration you need to take into account when you incorporate your business, is deciding on the type of business entity you will form. There are several types you can pursue. However, the type you ultimately select, again, has very much to do with your personal tax and business situation.
For example, you could decide to setup a corporation and choose between an S-Corporation, which will enable pass-through income to you for tax purposes, or you could decide on a C-Corporation, which has less tax advantages. Each corporation has a different set of requirements.
When incorporating, you also need to consider the volume of paperwork in store for you. You need a registered agent in the state that you decide to incorporate, along with ensuring that you stay up to date with your minutes, profit-and-loss statements, and of course your state franchise taxes and federal taxes as well.
It can all seem overwhelming at best. For that reason, you need to ensure you work with a reputable company when setting up your corporation and registered agent such as The Company Corporation. You also need to ensure you have all your legal ducks in a row, so to speak, by going with a company like Legal Zoom.
What Type Of Corporation Should I Choose?
Choosing the best type of legal structure for your business is not something you should consider lightly. In fact, the type of corporation you decide to incorporate can have a major impact on your probability of success. Choose poorly, and you could be facing a costly mistake, which might even be impossible to extricate yourself from.
So choose wisely…
However, before you choose, you need to be informed. There are several types of corporate structures, but only some are more formal than others. While I did make mention of the S-Corporations, C-Corporations, I haven’t yet delved into things like Limited Liability Companies (LLCs) and non-profit corporations, for example.
Clearly, you have some options. Here are the types of business entities you can select and just what you can and cannot do with them. Some lack the formalities of a standard corporation. Others require legal, tax and regulatory hurdles to see them through to fruition.
#1 — Sole Proprietorship
Okay, so this isn’t exactly a corporation. You can’t incorporate a sole proprietorship. You’re simply doing business as yourself in your own name. For those that are looking for an informal approach to business, clearly this is one option. However, you lose all the protections of having a corporate umbrella to operate within.
#2 — Doing Business As (DBA)
As a sole proprietorship, you can only operate under your name. If you want to operate under a business name without the protection of a corporation, you could file for what’s called a Doing Business As (DBA). This is essentially a fictitious name or a business name that you can trade under without formally incorporating a business.
#3 — Limited Liability Company (LLC)
Serious about incorporating with the protection of a corporate umbrella? You could file for a limited liability company (LLC). LLCs have less formalities than other corporations. You don’t need to hold board meetings or maintain records for every decision you make in the company. However, you do limit your personal liability, making it great for things like asset protection.
#4 — Corporations
The corporation offers up a large number of benefits to running a business that include tax and legal implications. However, it does also involve a greater deal of paperwork and filings. S-Corporations, generally don’t pay any federal income tax, instead passing the income largely to its primary shareholders. Whereas, a C-Corporation, is taxed separately from its owners.
#5 — Non-Profits
Of course, if you’re interested in some altruistic pursuits, a non-profit corporation might be the way to go. Non-profits don’t pay federal or state income taxes. It’s often created for the purposes of pursuing some form of education or socially-charitable causes. However, gaining non-profit status isn’t a simple or straightforward task by any means.
Incorporating Your Business
Ready to incorporate your business? Doing this online is simple and its straightforward. However, before you incorporate your business, you need to decide on the type of business you’re going to form. Again, this should largely be based on the advice from your legal and tax representatives, but there is a framework for understanding the type of business you’re going to form.
The Company Corporation offers up a handy guide for helping you determine the type of business you want to form. It’s broken down by LLC, S-Corporation, C-Corporation, General Partnerships and Sole Proprietorships. If you’re looking for something with minimal paperwork and hassle, an LLC is likely the way to go.
Let’s just say for example, that you’re not a U.S. Citizen. You can still incorporate a C-Corporation in the United States or an LLC but you won’t be able to setup an S-Corporation. However, if you’re an LLC, you won’t be able to issue shares to attract investors like you’d be able to do with an S-Corporation or a C-Corporation.
In fact, if you’re creating a startup in the tech or biotech industry, you’re likely going to choose a C-Corporation if you’re intending to go public. Generally speaking, only C-Corporations can go public, so if you are creating a startup that you envision will one day become the next Facebook or Google, then you should go the C-Corporation route.
Setting Up Your Corporation Online
If you’re ready to setup your corporation online, here are the things that you’re going to need to do and have:
- Know the state you’ll incorporate in (often your state of residence)
- Decide on the type of corporation you’ll create
- File for a Federal Employer Identification Number (EIN)
- Setup a Registered Agent for your corporation in your state
- Ensure that you’ve created Bylaws (requirements vary from state to state)
When you’re ready to setup your corporation, you have two primary choices. The most popular choice would be The Company Corporation. You can go through the steps online and create your corporation there. Or, you can opt to use Legal Zoom, another very reputable source for creating your corporation. The decision is largely yours. Keep in mind that you’re going to have maintenance fees associated with your corporation.
Find yourself a good accountant (if you don’t already have one) that’s savvy when it comes corporate taxes. You’ll also need to strategize and decide on how you want to handle the income that comes through. This is going to vary depending on the type of corporation that you select.
Unless you have grand designs to one day go public, you’re likely going to pick an LLC or an S-Corporation. Whatever type of corporation you end up selecting, here’s my suggestion to you. Get extremely organized. Create a calendar of dates for your corporation when you know that certain things will be due such as Franchise Taxes or filing shareholder notices and so on.
Either way, best of luck to you. Incorporating your business online is easy. The hard part is actually succeeding with that business. Many businesses fail for a reason. It’s because their founders give up. Clearly, it’s not going to be easy but it is going to be well worth it.