Do you have a new business that you wish to incorporate? Or maybe you’ve been working under a sole proprietorship and you’re ready to convert to a corporation? Whether you’re just starting out or you’ve been in business for several years, a business can become a corporation by filing the appropriate paperwork with their governing agency.
A corporation makes a business become separate from a personal entity. It separates personal assets from business assets. A corporation can have only one person within it, but it can also have several officers. There are two types of corporations that can be started: an S-corporation and a C-corporation.
- S-corporations are generally designed for small business owners. They aren’t usually required to pay corporate taxes and will instead pay taxes only on dividend earnings.
- C-corporations are for larger businesses or for other business structure types that are growing unexpectedly fast. You’ll have to pay corporate taxes in this structure and setup a board of directors.
What Are the Advantages In Becoming a Corporation?
The primary benefit is that incorporation separates business assets from personal assets. Your company can go out of business or file for a bankruptcy and this won’t put your personal assets at risk. An LLC is another business structure that offers a similar advantage.
A secondary advantage is that fewer taxes are often paid in a corporate structure than in other businesses. This means that if there are large profits being made, the amount of savings can be pretty remarkable.
A corporation also has the advantage of continuing on even though its founding member(s) may no longer be involved in the business… or even living. If there’s a personal bankruptcy, this will end an LLC, partnership, or sole proprietorship. The same is true if the person who founded the business should pass on for some reason. The corporation structure, however, is not affected by these life events at all.
How Does the Conversion Happen?
Remember how you initially setup your business? You file the appropriate paperwork with your governing body, were issued permits, and eventually were given permission to operate as a business. The same process has to be followed once again to create the corporation. You can remain in business while the paperwork is being processed, but once the conversion happens, you will be recognized as a new business.
What does this mean? If you convert a business from a sole proprietorship or partnership to a corporation in the middle of a tax year, then there will be two tax returns that must be filed for the upcoming tax year. This is because each business is considered separate from the other.
To form the corporation, you’ll need to fill out the appropriate paperwork and pay the filing fee associated with it. This fee can be upwards of $1,200 in some states, so this is why many businesses choose a different structure at first. Part of the paperwork includes filing articles of incorporation, which is often just a basic document that is provided by the Secretary of State or similar office that governs businesses.
Some states will use a “charter” or a “certificate” instead instead of articles in their terminology. The document does the same thing. You’ll need to sign this paperwork, have a contact listed as a registered agent, and have a public contact number so that people can connect with your newly incorporated business if need be.
Hold the Meetings You May Need to Hold
If you are setting a board of directors, then you’ll need to hold your first meetings after filing the incorporation documents and have them part of the official record. If you plan on issuing shares, then you’ll need to comply with state and national laws and have a small business lawyer on hand to help out with the process.
You may also need to obtain new business licenses, obtain a new employer identification number, and zoning permits for your place of business. Each jurisdiction has different laws regarding the transition from one form of business to a corporation. There are also national-level obligations that may need to be met as well.
The benefits of becoming a corporation are great, but they come with a cost. If you’re expecting a highly profitable year and you aren’t structured as a corporation, then consider making this investment today. It could be an easy way to limit your tax liabilities while setting up your business to handle future growth needs at the same time.