A Brief Guide to Incorporating Your Small Business

By Rob Sabo | Posted October 17, 2012

The decision whether to incorporate your business, which type of corporation you should form, and where you should incorporate is a choice not to be made lightly. Incorporation offers many benefits over being a sole proprietor or a general/limited partnership, including liability protection and additional tax deductions. Be sure to discuss your options with a business attorney.

True, there are some drawbacks -- ongoing state fees, additional record keeping and taxes on profit distributed as dividends. But incorporation also signals others that your business is a serious venture. Here's a quick look at three common corporate structures and the benefits and drawbacks of each.

3 Types of Business Incorporation

C Corporation

C-corps are the most common business entity for several reasons. They are formed as a separate legal entity that's wholly controlled by company shareholders, which protects the business owners from corporate liabilities and debt -- the reason why it's such a popular choice.

You can have an unlimited number of shareholders with a C-corp, and ownership is easily transferred if your business eventually attracts a buyer. If your goal is to grow your business and exit in a few years through divestiture, this is the best entity to choose. Drawbacks include higher cost, the need for corporate formalities such as annual director meetings, and ongoing filing requirements imposed at the state level.

S Corporation

S-corps also offer liability protection to shareholders, and shareholders enjoy certain tax breaks not offered under other business structures, such as the double taxation of corporate profits. However, shareholders must be kept to 100 or less, and each shareholder must be in agreement to the election of an S corporation. You still have to meet state filing demands and fees, and you also are required to have the often burdensome annual director and shareholder meetings.

Limited Liability Corporation

The growth in popularity of LLCs is attributable to several factors. First, there is the benefit of side-stepping double taxation on corporate profits (members report profit or loss on their individual tax returns). Second, you can skip those dreadful annual meetings, and you have much greater flexibility when structuring corporate management of the LLC. Cons include difficulty in transferring ownership and a relative lack of legal history if you ever face adjudication of business issues.

Forming a corporation also allows you raise capital through sale of shares of your company -- a crucial growth path for many ventures.

This is of course a quick glance at the benefits of each type of business entity. Kick your thoughts on incorporation around with a business attorney before settling on a structure. He or she also can help you decide on where to incorporate – depending on your situation, the corporate safe havens of Delaware and Nevada may or may not be your best option.

And be sure to check the Small Business Administration website for more information on small business incorporation.

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