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You have a great idea for a business, and you have spent countless hours crafting your business plan. Is it now time to incorporate your idea? It depends.
A corporation is a separate legal unit from its owners. It exists once it has a unique name, incorporation paperwork is filed, and fees are paid. A corporation is comprised of three groups: officers, who manage the daily operations; directors, who oversee the overall operations and appoint officers; and shareholders, who own the company's stock and vote on various issues — they elect the board of directors, for example. A corporation can consist of one person, who holds all three roles, or many people.
Because a corporation is legally distinct from its shareholders, it presents multiple benefits:
Despite the benefits, incorporation isn't for every business. In some cases, the cost and complexity of filling out paperwork and maintaining corporate files outweigh the tax and legal advantages. Also, a corporation must pay taxes when it distributes its profits to its shareholders — this is in addition to the taxes it pays on its profits. Because of these reasons, many small companies choose other business forms, such as S corporations, partnerships, or LLCs.
A company choosing to become an S corporation is not taxed as a separate legal entity, even though it is a form of a corporation. Instead, such a corporation has made an election with the IRS that allows its shareholders to report profit or loss on their individual tax returns, rather than the corporation's return. Companies with fewer than 75 shareholders may choose to qualify under subchapter S of the IRS code and take advantage of this alternate form of tax reporting.
For some companies, partnerships work best. This arrangement allows profits to be passed through to shareholders and not taxed at the corporate rate. However, partnerships do not allow for the issuance of stock, nor can a partnership shield the owner from liability in the way a corporation does.
An LLC is not considered a separate legal entity from its owners as is a corporation, but it operates more informally than a corporation since there are fewer requirements and restrictions on its operations. LLCs combine the limited liability benefits of a corporation with the tax benefits of a partnership. In most states, one person can start an LLC. The profits of an LLC are taxed on the owner's income tax.
Online sources can guide you through the incorporation process. First check with your state's government Web site to review the requirements for incorporating. Almost all states provide instructions, fees, and downloadable forms online. For example, Rhode Island's Secretary of State Web site includes downloadable forms, fees, and an online, searchable database of corporations that can be useful when deciding on a name. The site also presents weekly listings of new incorporations. The Arkansas Secretary of State Web site allows business owners to incorporate by filling out forms from their desktops and submitting them online for an additional $5.00 processing fee.