Incorporating your business or forming a separate business entity can provide significant legal and financial advantages. Corporations can offer entrepreneurs asset protection, as well as opportunities to sell stock and attract investors. You can also build business credit and apply for financing in the name of your business, rather than personally. 

Learn about your options for incorporating your business. 

What is a Corporation?

The root of the word corporation is the Latin word “corpus”, or body. In the eyes of the law, a corporation is a person. This person stands independent from the people who formed it and make it run. It can sue someone, buy a car, sell a product, set up contracts, and pay taxes. 

Most businesses in the US operate as sole proprietors, which means they have no legal business structure. They may create a business name and get business licenses, but there is no legal separation between the business and the owner’s personal finances. 

For business owners, the main advantage of a corporation over a sole proprietorship is that the corporation itself is liable for its actions, rather than having the responsibility falling on the individual officers. Additionally, corporations can enjoy unlimited life — the existence of the company doesn’t depend on the presence of any one person or group of people.

What Is Incorporation?

Incorporation is the legal process of forming a corporation, creating a separate legal entity distinct from its owners. This process involves filing articles of incorporation with a state government, establishing corporate bylaws, and completing other required documentation. 

While people sometimes use “incorporation” to describe forming any type of business entity, it technically refers specifically to creating a corporation. (You form an LLC or partnership, not incorporate them.)

As we just described, the corporation becomes its own legal “person” that can enter contracts, own property, pay taxes, and take on debt separately from its owners. However, incorporation brings additional responsibilities, including more complex tax requirements, regular board meetings, detailed record keeping, and annual state filings. These requirements don’t have to be terribly cumbersome, but are worth considering before you decide to go this route. 

Common Corporate Structures

The two main types of corporations you’ll hear referenced are C Corporations and S Corporations. An LLC, or Limited Liability Company, is another type of legal entity recognized by state law but it’s technically not a corporation. (To further confuse things, LLCs may elect to be taxed as S corporations! More on that in a moment.)

Each business structure comes with advantages and disadvantages, but all have the central advantage of helping to ensure that individuals are not personally responsible for business debts and obligations. That generally means personal assets are protected if the business is sued, provided the business entity is properly formed and maintained. 

Let’s take a closer look at each type of business structure individually.

C Corporation

A C corporation is the corporate structure most commonly preferred by business owners seeking investors. Investors contribute money and goods to a company in exchange for shares of stock in the company. The legal structure of a C corporation consists of a board of directors, officers, and shareholders who are required to hold annual meetings and record minutes. In addition, the rules for C corps are generally consistent from state to state. This combination of predictability and close accountability is attractive to those seeking to minimize risk when investing capital.

One of the biggest disadvantages of a C corporation is that its profits are taxed twice. This is called double taxation — the profits of the corporation are taxed once as corporate income when earned by the corporation itself, and again when distributed as shareholders’ dividends.

Pros and Cons of a C Corporation

S Corporation

An S corporation is a tax election. You can form a corporation or an LLC, and then elect with the IRS to be taxed as an S corporation. (Not all corporations will qualify to be taxed as an S corp, though. Talk to your tax professional if you want to pursue this option.)

Thanks to what is known as pass-through taxation, the owners of S corporations report their share of profit and loss on their individual tax returns. This may result in the tax advantages. S corporation owners who are employees must take a reasonable salary but they may also get distributions (or “owner’s draw”).

While the salary will be subject to payroll taxes (Social Security and Medicare), the distributions will not. Though other taxes on those distributions will apply, the overall tax rate will usually be lower, providing tax savings. However, the IRS may scrutinize both payroll and distributions, and could potentially recharacterize either, resulting in a tax liability and even a penalty.

Pros And Cons Of An S Corporation

Limited Liability Company (LLC)

An LLC is one of the most popular entity structures for new businesses. It offers the asset protection of a large corporation but with a lot more simplicity. Owners are called members, and there is no limit on the number of members an LLC can have. They don’t have to be U.S. citizens or permanent residents, either. 

The LLC can either allow business revenues and expenses to pass through to owners’ personal income tax returns as it would if they were a sole proprietor (one member) or partnership (multiple members). Alternatively the LLC can elect to be taxed as a corporation. There’s also flexibility in terms of how profits are shared or distributed. 

Pros And Cons Of A LLC

What Is The Best Way To Incorporate A Small Business

To incorporate your business, you’ll need to determine which state you want to incorporate in; that may or may not be your home state. Then you need to file the required paperwork with the state agency, which may be the Department of Corporations, Secretary of State, or something similar. If you form your corporation in a different state (popular choices include Wyoming, Delaware, and South Dakota) you may need to register as a foreign corporation in your state. 

There are three main ways business owners can set up a business entity:

1. Do It Yourself: You can research types of entities and reporting requirements and do it completely yourself. 
2. Hire an attorney: You can hire an attorney with experience in business formation to set up your corporation or LLC or you. 
3. Hire a business formation service:  Business formation services can help you form an LLC or incorporate your business quickly and relatively inexpensively.

Your choice will depend on several factors including the time you want to put into it, your business startup budget, and your comfort level with legal documentation.

The do-it-yourself approach typically costs less, requiring only direct state filing fees. This option works well for business owners who have time to research requirements, feel confident completing legal forms, and want maximum control over the process. 

However, DIY formation requires careful attention to detail and a thorough understanding of all filing requirements. You’ll need to create your own articles of organization or corporate bylaws, for example, though you may be able to work from templates. And most states provide detailed instructions and fillable forms on their business registration websites.

Formation services offer a middle ground between handling everything yourself and hiring an attorney. Many of these services offer a variety of free services the first year, though you’ll always need to pay state filing fees and there may be costs for additional services (such as a registered agent to accept service of process in the event of a lawsuit). 

Business formation services can handle the entire filing process, including preparing documents, submitting state paperwork, providing compliance reminders, and offering registered agent services.  

For many business owners, formation services offer good value by saving time and reducing the risk of filing errors. They’re particularly helpful for businesses registering in a state with complex requirements or owners who want peace of mind that everything is handled correctly. 

If your goal is to grow big and grow fast, you may want to get legal advice. Just deciding on the number of shares to issue can be a question that can use expert advice. 

Think about about:

• Your budget for formation costs
• How much time you can dedicate to research and paperwork
• The complexity of your state’s requirements
• Whether you need additional services like registered agent service
• Your comfort level with legal documents
• How quickly you need the business formed

What Is Required To Incorporate A Business

Though the procedure may vary slightly by state, generally to form a corporation, you must:

• Choose a corporate name for the business
• Decide which state to incorporate in
• Get a registered agent to accept service of process
• Prepare and file Articles of Incorporation or Certificate of Incorporation with the state authority
• File as a foreign corporation in other states if required
• Pay filing fees
• Create corporate bylaws
• Get an Employer Identification Number (EIN)
• Hold a meeting of the stockholders
• Issue stock

These steps aren’t terribly difficult but they can be confusing and if you miss important steps, it could create problems down the road. 

You’ve Incorporated Your Business. Now What?

Your main job after incorporating—aside, of course, from keeping up with the strenuous demands of running a business—is to follow the rules. These are called “corporate formalities” and include things like keeping accurate records, holding annual meetings, filing annual reports, and getting professional advice when needed. Fail to follow those and you may not have the personal liability protection you expected. 

In addition there are other tasks you’ll need to be sure to take care of:

• Pay taxes, which may include state and federal taxes, payroll taxes, sales tax etc. 
• Get the appropriate business licenses
• Purchase business insurance
• Open a business bank account
• Build business credit

These steps together will help you build a solid business foundation that can help your business qualify for small business loans and other types of financing in the future. 

• Can I live in a different state than my corporation?

  Yes, you may choose to incorporate in another state and there may be good reasons to do so.  If you incorporate in another state, however, you’ll often also need to register in your home state as a foreign corporation at some point and pay additional filing fees. 

• What is the difference between corporation and incorporation?

  Incorporation is the process of forming a corporation which is a legal entity. 

• Is it better to incorporate or form an LLC?

  The choice between forming an LLC or corporation depends on your business goals, growth plans, and operational needs. LLCs generally provide the best combination of benefits for most small businesses, offering liability protection and tax flexibility with fewer administrative requirements than corporations. They’re especially well-suited for businesses that want simplicity in management and reporting while maintaining professional credibility.
  
  Another advantage of an LLC over a corporation: it may be harder for someone who sues the business to get control of an LLC. Attorney Brad Wiewel explains why in this article: Why Business Owners Are Choosing LLCs Over Corporations.
  
  Corporations make more sense for businesses planning to raise significant capital through stock sales, go public eventually, or operate in multiple states. They require more extensive record-keeping, regular board meetings, and complex tax compliance. They also face higher formation and maintenance costs than LLCs. 
  
  Unless your business specifically needs corporate features like the ability to issue stock or plans rapid expansion, an LLC structure typically provides sufficient protection with less complexity.
  

• What does it cost to incorporate a business?

  As with most small business costs, the answer is “it depends”. Costs vary significantly by state and the type of filing service used.
  
  State filing fees range from around $50 to over $500, with most states charging between $100 and $250. Additional costs may include name reservation fees, registered agent services, and annual report fees. Operating in multiple states requires foreign qualification filings, which add more expenses.
  
  Professional formation services typically charge $100-300 plus state fees, while attorney fees for incorporation can range from $500 to several thousand dollars depending on the complexity of your business structure and needs. Ongoing costs include annual report fees, registered agent fees, and any required license renewals. When budgeting for incorporation, remember to account for both initial filing costs and recurring annual expenses to maintain corporate status.

• What does it mean for a business to be incorporated?

  When a business incorporates, it becomes a separate legal entity from its owners, creating a distinct “corporate person” under the law. This separation means the corporation can enter contracts, own property, sue and be sued, and take on debt independently of its owners. The corporation continues to exist even if ownership changes, providing stability and continuity for the business.
  
  Incorporation also establishes a formal structure for ownership, management, and operations. The business must follow corporate formalities including holding regular board meetings, maintaining detailed records, and filing annual reports. This structure provides a clear framework for decision-making and accountability but requires ongoing compliance with state corporate laws. The corporation’s income is taxed separately from its owners, though S-corporations can elect pass-through taxation similar to LLCs.
  
  Again, sometimes the term “incorporating” is also used to describe the formation of an LLC, but technically LLCs are formed, not incorporated.

• What is a disadvantage of incorporating?Header

  One major disadvantage of incorporating is the extra work involved, when compared to an LLC or even a sole proprietorship. 
  Corporations must hold regular board meetings, follow corporate bylaws, and file detailed annual reports. While these requirements don’t always have to be overly onerous, they do take time and attention from business owners, and may require professional legal and accounting assistance, which adds to operating costs.
  
  Another major drawback is the potential for double taxation in C-corporations, where profits are taxed at the corporate level and again when distributed as dividends to shareholders. While S-corporations can avoid this through pass-through taxation, they face their own restrictions including limits on the number and type of shareholders. Additionally, corporations face higher formation and maintenance costs than LLCs or sole proprietorships, including state filing fees, registered agent fees, and ongoing compliance expenses.
  
  And finally, ongoing costs for maintaining a corporate entity are often higher. Your tax preparation fees for a corporation may be more expensive than for an LLC, for example.