Many small businesses consider themselves ‘too small’ to worry about incorporation. However, whether you’re a self-employed social media consultant or a landscaper, incorporating or forming an LLC (Limited Liability Company) can be a smart idea and here’s why:
- Liability Protection
- Tax Savings
- Establishing Business Credit
- Raising Capital
Fortunately, the incorporation process has been greatly simplified these days, so there’s simply no reason to delay incorporating your business or forming an LLC.
So, you’ve done your research and decided to form an LLC or incorporate your business. Maybe you want to protect your personal savings and other assets, maybe your financial advisor mentioned you could save in taxes, or maybe you simply need a legal structure to win a large client
contract. Whatever the reasoning, it’s time to take the next step for your business. The only question is how?
For the small business owner, this process raises many questions. Where do I start? How much does it cost to incorporate or to form an LLC? How long does the process take? Can I form my own corporation or LLC or is an attorney required? In this post, I’ll break down the steps required to incorporate a business or form an LLC, as well as explain the three different methods: do-it-yourself, legal filing service, or an attorney.
In most cases, you can set up an LLC or Corporation with the secretary of state’s office for whichever state you choose as your ‘state of incorporation.’ And as a general rule of thumb, if your business will have fewer than 5 shareholders, it’s best to just incorporate in the state where you actually live or have a physical presence.
Here’s a quick overview of the process for both the LLC and Corporation:
How to Incorporate a Business?
To form a corporation, you’ll need to take the following steps:
- Draft “Articles of Incorporation”or “Certificate of Incorporation”
- The Articles of incorporation must be executed by a person designated as “incorporator.” The incorporator must be an adult and doesn’t need to be affiliated with the corporation in any way other than merely filing the document. Later, this person will pass a resolution assigning all rights and duties to the board of directors.
- Submit your articles of incorporation. In most states, the agency responsible for corporate filings is the Secretary of State (usually the Corporations Division).
- Once the state office has processed your documents, they will return the certified documents to the address provided.
- Elect a board of directors: The Incorporator executes a corporate resolution electing a board of directors assigning all rights and duties to the board.
- Issue shares: The Board of Directors issues shares to designated shareholders.
- S-Corp: And lastly, if you want the pass-through tax treatment of an S-Corp, you’ll need to file IRS Form 2553 with the IRS within 75 days of the start date of your corporation.
How to Form an LLC?
The LLC requires much less formality, while still protecting the personal assets of the business owners from any liability of the company. For an LLC, you’ll need to file Articles of Organization or Certificate of Organization with your state’s secretary of state. While the LLC is less formal, these documents must contain at least the minimum requirements as described by state law before they can be successfully filed (and your LLC processed).
How long does the process take?
Depending on the state and its current workload, processing times may vary from 1 day to 3 months. Unfortunately, as states are facing budget issues and staffing cuts, we are seeing longer backlogs, particularly at the beginning of the year. There’s also a ‘rush filing’ option, which in many states must be done via walk-in delivery. If you’re filing yourself, you can bring the completed forms in person to the secretary of state’s office. And if you’re using an online filing service, they will have a courier located near the state office to bring in your forms for rush service.
How should I file the paperwork to Incorporate or Form an LLC?
The three methods for filing your Articles of Incorporation/Organization are: do-it-yourself, a legal filing service, or an attorney. For full disclosure, I am founder and CEO of CorpNet.com, an online legal document filing service and have helped hundreds of thousands of small business owners incorporate a business or form an LLC, but will hopefully provide objective advice here, because depending on your specific situation, each option has its own set of pros and cons.
- Do-it-yourself: In this case, you can download or request the forms from your secretary of state’s office, complete, and submit the forms on your own. This is obviously the lowest cost method (you’ll still have to pay the state filing fee; exact fee amounts vary by state; for example, in California it’s $115 for a Corporation and $85 for an LLC for standard filings). This is a good option if you’re more concerned about saving money than time, and if you have a relatively high tolerance for paperwork and minute details.
- Online legal filing service: An online legal filing service such as Corpnet.com will file the documentation for you. This option is slightly more expensive than filing yourself, but for some, the time savings is invaluable. Legal documents can be tedious, time-consuming and fraught with details. Regulations and requirements vary across states, even down to the little details like paper size, font size, number of copies, ink color, etc. By turning to a service that specializes in these matters, you can save yourself the headache and hassle of learning and staying current on each and every detail. And you can focus your time and energy on your own business. Of course, it’s important to understand that a document filing service is well… a document filing service. It’s not a substitute for an attorney, accountant or tax advisor. These service companies cannot give you specific legal or financial advice for your set of circumstances.
- Attorney: If you have particularly complex business needs — for example you have strict requirements for shareholder structure or stock allocation, or you’re dealing with millions of dollars up front — you should retain your own expert counsel to help get you started. An attorney will be able to assess your situation and provide specific legal advice. Likewise, a tax or financial advisor can help you figure out the financial implications in forming an LLC, S Corporation, or C Corporation.
When it comes to legal matters, I’ll be the first to say that trying to save a few dollars up front can end up costing you big in the long run. Trust your gut; if you feel like you need to bring in expert counsel, then by all means do so. Just remember that you are able to file for incorporation or LLC formation without an attorney, and this could be a reasonable and cost effective way to go. Whatever method you choose, make sure to pat yourself on the back for taking this important step for your business and yourself.