Thinking About Incorporating? Read this First
How much does it cost to incorporate a business and can you do it yourself?
Every state charges some fee to process your paperwork. In Indiana, it costs $85 plus a small credit card processing charge to file Articles of Incorporation with the Secretary of State. Should you pay someone an additional fee to actually do the filing for you?
In most cases, the answer is probably not. The procedure is fairly simple and straightforward and in many cases can be accomplished on-line in under 15 minutes. You do not need to be an attorney or have an attorney to fill out these forms.
You can also file in person, by mail, or via fax.
But that’s really NOT the question you should be asking if you’re starting a new business (or growing an existing one). The first question you need to answer is:
What choice of business structure makes the most sense for you at the place your business is right now?
The second question is:
How do you figure out the answer and who can help you?
It’s not impossible to change your structure sometime down the road if your circumstances change or if you think you’ve made the wrong choice. But there can be unintended costs and tax consequences (not to mention stress and loss of productivity), so it’s worth your while to do your research on the front end.
It’s critical to have right advisers guiding you in the decision process. Nothing against attorneys (some of my best friends are attorneys), and I recommend getting legal counsel for legal matters. But incorporating a business (or not) is not strictly a legal matter.
An attorney can tell you the legal procedure required to become a corporation, but unless he/she is also a tax accountant or tax attorney, he/she probably can not competently speak to the other areas that you need to consider, such as tax regulations, payroll, medical insurance, retirement plans, and other fringe benefits. It’s not fair to expect your attorney to be knowledgeable in these areas.
It IS fair, and makes perfect sense, to expect a CPA or accountant who specializes in small business startups to know about these things and be able to explain them to you. This type of consultation should probably take between an hour and an hour and a half in most cases.
It also makes sense for you to educate yourself in these areas. Colleagues and business associates are often an easy source of information, but don’t make the mistake of relying entirely on other business owners to collect your data.
The advice that Jane Doe got from her accountant might have been the best for her, but just because you want to start the same kind of business, that doesn’t mean that advice will be the best for you. Your personal and family situation, goals, and desires, might be quite different.
A good place to begin learning about business structures is by reading the on-line articles at Nolo (a legal publisher known for easy to understand material).
What about limited liability?
Unfortunately, this is one of the most poorly understood concepts of business structure. Many new business owners think that the concept of limited liability means that as individuals, they are entirely separate from their corporation and can’t be held responsible for ANYTHING it does.
This is absolutely NOT true.
The limited liability provided by a corporation means that creditors of the corporation can not go after a shareholder’s personal funds to satisfy payment of business debts, unless the shareholder has personally guaranteed the obligations. In many cases of 1-owner companies, this is exactly what happens when the company needs to borrow money or get a credit card. The lender requires a personal guarantee from the shareholder.
So much for limited liability.
It’s my understanding that the limited liability of a corporation does not protect you from claims arising from your acts or omissions such as fraud, negligence, or illegal activity. It does not protect you from claims regarding contracts you have personally guaranteed. It might not protect you from claims of product liability.
This is an area which you should discuss with your attorney AND a competent independent insurance agent.
I’ve seen many new business tax clients over the years who, after following their attorney’s advice, find out that they’re required to file (and pay for) tax forms that they didn’t realize existed or that they had no idea they were subject to.
Many have wound up with needless layers of complexity and higher tax preparation fees than they otherwise would have, if they had simply talked to an accountant FIRST.
There’s nothing wrong (and lots of things right) with operating your one-person business as a sole proprietorship when you first get started. See how it goes before you complicate things.
It’ll do wonders for your productivity!
