What Is Incorporation in Business & How It Works

Incorporation is the process of registering a business as a corporation. Incorporation can be done through your state’s official business registration website or an online legal service. Typically, the cost to incorporate a business is anywhere from $50 to more than $5,000 for larger corporations that require the assistance of an attorney.

How Incorporation Works

A business becomes incorporated (a corp) when the appropriate documentation is filed with a state’s Secretary of State office. To incorporate a business, you can go directly to your state’s official business registration website and follow the recommended steps.

An alternative way to incorporate a business is through an online legal service, such as IncFile. An online legal service submits your business’s incorporation documentation for a fee. Currently, IncFile submits incorporation documentation for free, plus any state fees. The state fees to register your corp range from $45 in Arkansas to $290 in Massachusetts.

The documentation needed to incorporate your business varies from state to state. A common document is the Articles of Incorporation (in some states it’s called the Certificate of Formation). This document contains the basic information about the business such as the name, place of business, and statement of purpose.

Another document that needs to be submitted during incorporation is the company bylaws, which details the company’s structure and how the corporation’s officers will oversee the organization. Both the Articles of Incorporation and company bylaws are submitted during incorporation and are required before the Secretary of State’s office approves the corporation.

During the incorporation process, all businesses have to submit articles of incorporation before becoming a corporation Source

C-corp vs S-corp

Many people are confused by the difference between an S corporation and a C corporation. The S-corp isn’t technically a legal business entity. You cannot incorporate as an S-corp. You can only elect S-corp status with the Internal Revenue Service (IRS). A corporation is a C-corp by default and has to elect to be an S-corp, which is mostly done for tax purposes.

What makes the difference between S-corp and C-corp confusing is that limited liability companies (LLCs) can also elect S-corp status for tax purposes. Because the LLC is easier to maintain (no yearly recorded minutes or bylaws), most small businesses choose to create an LLC and then elect S-corp status instead of the C-corp electing S-corp status. In fact, Congress created the S-corp in 1958 to give small business owners the liability protection of a corporation with the low tax rate of a sole proprietorship.

What Type Of Businesses Needs To Incorporate

There are several scenarios when it is required for a business to become a corporation. For example, a business with an owner outside of the United States needs to become a corporation. A business that has (or plans on having) more than 100 shareholders must be a corp as well.

The following types of business must incorporate:

• Businesses with foreign owners: If the business plans to have international owners, make it a corp.
• Businesses seeking venture capital: A business that currently needs or plans on needing a sizable investment.
• A business owned by another business or trust: It’s possible for a business to be owned by an LLC or a different corp. If this is the situation, the business must be a corp.
• Businesses going public: If you want your business to do an initial public offering (IPO) where it sells stock to the public, it must first be a corporation.
• Larger businesses: With corporations (specifically C corporations) there are no limitations on the number of shareholders.

The vast majority of small businesses choose to be an LLC. A small business owner typically doesn’t choose to be a corporation. They are required to become a corporation for one of the reasons above. If you’re unsure if your type of business requires you to become a corporation, it’s best to consult with a business attorney.

To elect S-corp status for your LLC or corp, submit IRS Form 2553 Source

Business Incorporation Costs

A simple corporation with one or only a few owners won’t cost much more than an LLC. In fact, you may find that a corp costs less to register than an LLC. That may be because the state wants to profit on the fact that 80% of registered businesses are LLC. A larger and more complicated corporation may end up costing more than an LLC because an attorney may need to draft up a document like the Shareholders’ Agreement.

The following are costs you need to consider before incorporating:

• First Time Registration: $100 to $800 (depending on the state)
• Yearly filing fee: $50 to $400 (depending on the state)
• Attorney fees: $500 to $5,000

In addition to the incorporation costs above, you need to consider the maintenance costs of a corporation when compared to an LLC. With a corporation you may need to spend additional money on tax preparation from a tax professional. You may need to pay someone to create and maintain corporate minutes. Additionally, if your company issues stock, you will need to issue stock certificates, which can be done digitally, but will be an extra cost if issued by paper.

Pros & Cons of Incorporating A Business

To help decide if a corporation business structure is right for your business, it’s important to consider its advantages and disadvantages. A corporation is the right entity if you’re seeking venture capital investors and want your business to exist after your ownership. Cons of owning a corporation include the double taxation, and yearly documentation maintenance needed to keep the corp business entity.

Pros of Business Incorporation

• Limited liability: With a corporation, the business owner’s personal financial assets are protected against liabilities, such as a business lawsuit or business bankruptcy.
• Easier to attract investors: After incorporation, the c-corp can have an unlimited amount of shareholders. It’s also easier than an LLC to give and transfer shares to investors.
• Perpetual existence: Unlike the typical LLC, if a business owner were to stop working at the corporation, the company continues to exist.

Cons of Business Incorporation

• Double taxation: The main con of a corporation is double taxation: at the corp level and the personal level. The current corporate tax rate in the United States is 21%.
• Maintenance: To keep the incorporated business entity, certain record keeping needs to be done every year, including minutes of the formal shareholder, director, and officer meetings.
• Higher costs: Operating a corp may have additional regulations in your state and may require the advice of an attorney. Additionally, filing taxes may be more complicated and require the assistance of an accountant specializing in corporations.

The cons listed above are typically dealt with because the business has no choice but to be a corporation. If the business has any of the features listed in the “What Type Of Businesses Need To Incorporate,” such as having a foreign owner or going public, then they must become a corporation. At some point your business will be so successful that you will be forced to become a corporation and deal with unwanted consequences like double taxation and higher operating costs. Avoid them in your business for as long as your business can.

How To Incorporate A Business

Incorporating your business is one step in the overall process of properly registering your business, which we define as ensuring you’re legally able to accept customers. To incorporate a business, you can visit your state’s official business registration website to submit your documentation and pay the fee.

Many business owners find their state’s business registration website cumbersome and confusing. Another option to incorporate is using an online legal service. These websites assist with document gathering and ensuring you’re submitting accurate information to the state. Additionally, you can choose the online legal service company to act as your registered agent. As a registered agent, the online legal service ensures your business’ yearly re-filing with the state is on time and avoids a potential fine.

Incorporation Providers

There are several online legal services that assist with incorporating a business. These businesses walk you step-by-step through the incorporation process, asking for important information about you and your business. Once the information is gathered, they submit the documentation to your desired business registration state. In addition to the incorporation service, many online legal services also provide additional services such as customizable legal documents, and providing affordable attorneys to answer legal questions.

1. IncFile

With IncFile’s basic Silver package, you can incorporate your business for free, plus any state fees. For the $149 Gold package, you receive a free employment identification number (EIN), corporation bylaws, organizational meeting minutes, and banking resolution. For the $299 Platinum package, you receive everything in Gold, plus free business contract templates, and an expedited state filing.

2. Rocket Lawyer

Rocket Lawyer charges a $99 fee for incorporation services. What makes this service unique is that it offers a $39.99 per month membership. With initial sign up, it includes a free business incorporation. Rocket Lawyer’s membership is a good idea if you will need ongoing legal documents created or the advice of a business attorney. As a member you receive unlimited free 30-minute legal consultations on new matters.

3. LegalZoom

LegalZoom provides standard incorporation services at fairly standard prices. It charges $149 (plus state fees) to file your corporation with the state. For $349, you can get expedited filing and rushed shipping. What makes LegalZoom unique is its intellectual property services and affordable ongoing legal advice for as low as $31.25 per month.

As a reminder, you don’t have to choose one of the above legal services to incorporate your business. You can go directly to your state’s official business registration website. However, many business owners choose to use an online legal service as a way to double-check that the paperwork is sufficient and accurate. It’s possible for paperwork to go back and forth between the Secretary of State’s office and the business owner because documentation is missing or incorrect. This process can last several months.

Which Legal Service is Right for You?

Alternatives to Incorporating a Business

There are other business structures in addition to a corporation. A sole proprietor is the most common business structure, but also provides no personal financial liability protection. The limited liability company (LLC) is the most common legal business entity, and provides financial liability protection for the business owner. An S-corp is similar to a C-corp, but is taxed only once instead of twice.

Sole Proprietor

Anyone who starts a business and files Schedule C taxes for that business is technically considered a sole proprietor. You may already be a sole proprietor and not have realized it. People decide to stay a sole proprietor to avoid the cost of registering a business. Typically, a business owner won’t jump from a sole proprietor to a C-corp. They may become an LLC first, and once they achieve a certain revenue figure, change to a C-corp.

Limited Liability Company

An LLC is a legal business entity that protects the business owner’s personal financial assets if a lawsuit were to occur against the business. In addition to the liability protections, the LLC requires the least amount of work every year to re-register the business. Regarding taxation, the LLC’s profits are distributed to its members and taxed at the personal level.

S-corp

Like we said earlier, the S-corp is not a business entity but an IRS taxation designation. Most business owners prefer to have S-corp taxation because they avoid being taxed at the corporate level. However, some corporations are required to be C-corps because the IRS imposes restrictions to the S-corp, such as, it must have less than 100 shareholders and there cannot be any foreign owners. S-corps operate in the same manner as traditional c-corps and must follow certain formalities, including minute record keeping.

Frequently Asked Questions (FAQs) About Incorporating A Business

This section includes the most frequently asked questions about business incorporation.

What is meant by incorporation of the company?

The incorporation of a company is a term used to describe the process of a business becoming a c-corporation legal entity. After the proper paperwork has been filed and approved by the state, the business owner can say it is incorporated, which means it officially is a C-corporation. Some business owners also use “Inc.” at the end of their legal business name to show that the business is incorporated.

What is the difference between corporation and incorporation?

A corporation is a legal business entity. Incorporation is the process of a business becoming a corporation. Often the process can be lengthy and an attorney will get involved to draft legal documents, especially if there are multiple owners or shareholders involved. Once the state in which the business is being registered incorporates the business, incorporation is over and the business is officially a corporation.

What is an example of incorporation?

A common example of an incorporation is when a limited liability company (LLC) becomes successful and wants to grow with outside investment by going public, which is also called an initial public offering (IPO). The LLC must go through the process of incorporation to become a corporation.

Bottom Line — What Is Incorporation in Business?

When deciding what type of legal entity to register your business, it’s important to understand corporate entity differences. Many business owners struggle to understand the difference between a C-corp and an S-corp. Remember that S-corp is a designation, not an entity. It is often called the “small business” corporation. C-corps are typically for larger companies with over 100 shareholders or who want to have an IPO.