How to Incorporate a Business: Everything You Need to Know

Corporations are one type of business entity. They tend to be the most complex to establish and maintain. 

Incorporating your business comes with perks. It offers personal liability protection for the business owner and shareholders. 

It can also make it easier to access funding. Incorporation lets you sell shares of stock in the company, which can be helpful if you’re looking to expand your business.

However, incorporating your business also comes with added costs and responsibilities, including filing fees and compliance with regulations. 

In this guide, we explain how to incorporate a business, along with the pros and cons of picking this business structure.

When you incorporate a business, you're establishing a separate legal entity under state law. 

As such, you’re not personally responsible for the debts and liabilities of the business. If the corporation is sued or goes bankrupt, your personal assets are generally protected.

A corporation is usually owned by shareholders and it may also be overseen by a board of directors.

The incorporation process looks different depending on where your business is located and whether you’re converting from another business entity to a corporation.

Incorporation may look different from state to state, but the basic process is the same.

Before you get started, it may be helpful to consult with a legal or financial professional to determine if incorporation is the right choice for your business.

The first step in incorporating your business is to choose a name for your corporation. The name must be unique and not already in use by another corporation. (Need help? Here are some tips on how to come up with a business name.)

Your secretary of state’s website should have an online database where you can find out if your proposed business name is already taken. 

If you want to use a trademark or logo, you’ll need to file with the United States Patent and Trademark Office.

And if you haven't already opened a business bank account, now is the time. You'll need an account and cards in your business name to pay your bills and accept payments from clients.

You’re required to incorporate your company in each state where it conducts business. 

You’ll likely need to incorporate in any state where: 

• Your business has a physical address in the state
• A major portion of your company’s revenue comes from the state
• Any of your employees work in the state

If you need to incorporate in multiple states, you might need to form your business in one state and then file as a foreign corporation in other states.

While it might mean extra paperwork, incorporating in a different state can come with perks, such as lower fees, fewer reporting requirements or even tax advantages. Many businesses are incorporated in Delaware, for example, because the state makes the incorporation process extremely easy. Delaware also doesn’t impose income tax on entities that do business outside the state.

There is more than one type of corporate business structure. 

The most common types of corporate entities are:

• C-Corporation: A C-corporation, or C-corp, is a separate legal entity from its owners, which means that owners are not personally liable for the corporation's debts and liabilities. C-corporations are subject to double taxation: The corporation's profits are taxed at the corporate level and then again when they’re distributed to shareholders as dividends.
• S-Corporation: An S-corporation, or S-corp, is similar to a C-corp in that it is a separate legal entity from its owners. The difference: An S-corp isn’t subject to double taxation. Instead, S-corps enjoy pass through taxation where corporate profits and losses are passed through to the shareholders, who report them on their personal income tax returns.

A registered agent is a person or entity that is authorized to receive legal documents like tax notices and lawsuit notifications on behalf of your corporation. 

The registered agent must have a physical address in the state where the corporation is incorporated, and be available during regular business hours to receive documents.

You can name yourself, the business owner, as the registered agent. Alternatively, you can appoint someone else from the corporation, name a business attorney or hire a professional registered agent service.

You’ll also need an employer identification number (EIN), a unique identifier assigned by the Internal Revenue Service. Even if you already have an EIN for your partnership or sole proprietorship, you’ll need a new EIN for the corporation. 

To obtain an EIN, you must apply online through the IRS’ website. It’s free to apply and the EIN is usually issued immediately.

If you’re forming an S-corporation, you’ll need to fill out and submit IRS Form 2553: Election by a Small Business Corporation within 75 days of the incorporation process.

Articles of incorporation are a legal document that outlines the basic business structure and purpose of your company. 

Articles of incorporation usually include:

• Name and address of the business owner
• The purpose of your business
• The number and type of shares of stock your corporation is authorized to issue
• The name and address of your corporation's registered agent
• Names and addresses of the people who’ll serve on the board of directors

You can download a PDF copy of the articles of incorporation on your secretary of state’s website. You can also file online in most states. 

You’ll need to pay a filing fee when you submit your articles of incorporation. The fee is usually around $100, but it varies by state.

Bylaws are the rules that govern how your corporation operates. They provide details on how decisions are made, how meetings are conducted, and how officers and directors are elected. 

Bylaws should also cover the procedures for making amendments, since the bylaws may need to be updated as your corporation grows and changes.

Some states don’t require bylaws but they’re important to have on hand. You may need to disclose them if you’re audited, need a business loan, or want to raise capital from investors. 

If your corporation has two or more owners, these documents are especially important.

Finally, you need to establish a board of directors for your corporation. 

The board of directors is responsible for making major decisions about the company’s management. They’re also in charge of making big financial decisions and ensuring the corporation complies with laws and regulations. 

At the first meeting, board members should formally vote to adopt the articles of incorporation and bylaws, authorize and issue shares of stock, elect officers and make other decisions about the company’s organization. Meeting minutes must also be taken because certain entities may require a copy of the notes.

Incorporating your business offers a number of benefits. It limits your personal liability as the owner or shareholder, provides a formal structure for your business and makes it easier to raise capital. 

By incorporating, you're typically only liable for the amount of money you've invested in the corporation, rather than being personally responsible for any debts or legal obligations of the business.

Incorporating your business can also make it easier to raise investment capital. That’s because when a company incorporates, it gains the ability to share ownership of the company by issuing shares of stock.

Incorporating a business costs money, and there are ongoing expenses associated with maintaining a corporation, including filing fees, annual fees, and legal fees. 

Corporations are also subject to more regulations and requirements than other business structures, and they require more paperwork (think corporate recordkeeping and holding regular meetings with directors and shareholders.)

Finally, a significant disadvantage of incorporating a business is the potential for double taxation. C-corporations are taxed at the corporate level, and shareholders are taxed on dividends and capital gains. That can mean a higher overall tax burden for the corporation and its shareholders.

Your business needs can change over time. You might have started your business as a sole proprietorship or a limited liability company (LLC), but now you want to convert your company to a corporate business structure. 

If you have a partnership or sole proprietorship, you'll need to follow the steps detailed above, and transfer all of your assets and liabilities to the new corporation. You’ll also need to obtain a new EIN. 

If you have an LLC, the process is more complex. While the exact steps vary by state, there are three main ways to convert an LLC to a corporation.

• Statutory conversion: This involves filing paperwork with the state to convert your LLC into a corporation. It’s a relatively straightforward process and typically requires approval from a majority of the LLC's members.
• Statutory merger: This involves merging your LLC with an existing corporation. This can be a good option if you want to keep the company’s existing legal structure and liability protections.
• Nonstatutory conversion: This involves dissolving your LLC and creating a new corporation. It tends to be the most complicated option. 

No matter how you convert your business, you should consult with an attorney or tax professional. They can help you navigate the legal and financial aspects of the conversion process, and ensure you're complying with all laws and regulations.

Rachel Christian is a Certified Educator in Personal Finance and a senior writer at The Penny Hoarder. She focuses on retirement, small businesses, investing and taxes.