Registering a business is something that every business owner must do. Registering your business allows customers to find you in government databases, state governments to know about your business and prevent a separate business from taking your same name, and the IRS to properly tax your business. A lot of business owners sometimes get confused with whether or not to register and incorporate their business. These are two very distinct concepts which are easily confused, but business owners should be sure they have a strong grasp of the differences to know the best actions to take for their business moving forward. In this article, we are going to go over what incorporating and registering a business means, and what factors you should consider before doing either with your business.
Registering a Business
Registering a business is simply informing the local governments of the name of your business and where you are operating. This is usually simply to prevent multiple businesses from having the same name in the same state. It also is sometimes required for tax purposes so that businesses can’t try and avoid taxation by changing their name. This is similar to filing for a “doing business as” (DBA) name that lets customers and governments know the name of your business in case they need to tax or sue the business (note that this is not the same thing as a business license). It other words, registering your business is simply notifying others of your name, and it does not come with any sort of protections or special statuses under the law.
How Do You Register a Business?
Registering a business is usually quite a simple process:
- See if the name is taken
- Notify the Secretary of State (in your state) of your name
- Update all licenses and permits with the name
- Notify the IRS of your name
- Reflect your name in business documents and contracts
- Reflect your name in your your online presence
- Communicate your name to vendors and customers
You can register your business yourself, or you can use third party websites in order to help you along the way like LegalZoom.
This is also the process you’ll have to follow when changing the name of your business.
Incorporating a Business
Incorporating a business is a way of setting up your business as a legal entity. This comes with its own sets of legal protections and a certain legal status. There are 3 types of corporations that are recognized by most states:
LLC- AN LLC, or limited liability company, is a corporation where the owner is not personally liable for the company’s debts and liabilities. Filing taxes as an LLC depends on the tax category you declare with the IRS, as an LLC can be taxed as a sole proprietorship, partnership, or corporation.
S Corporation- S corporations are companies that do not have to pay income taxes, which is the primary benefit for incorporating as one.
C Corporation- C corporations are companies that are taxed separately from their parent company’s or subsidiaries.
Benefits of Incorporating a Business
Whatever corporation you decide to incorporate as, there are a number of things that incorporation will do to your business:
- Protecting Personal Assets- Incorporating means that your personal assets cannot be targeted in lawsuits or debts where your company is a party. This is obviously very nice as the worst that can happen is that your company goes bankrupt, whereas if your personal assets are on the table your life could really take a turn for the worse if something goes wrong at your company.
- Easier Access to Finances- A corporation can sell shares of stock which is a good way to raise funds to expand your business. Corporations are also much more likely to be approved for loans from the bank than unincorporated businesses.
- Continuing Existence- A corporation can continue no matter what, even if the owners must step down or pass away unexpectedly. If you want your business to exist after you retire (or pass away), incorporating is something to consider.
- Tax Changes- Filing taxes as a corporation can be quite different, as corporations are taxed separately from their owners. Stock owners pay the taxes on their shares and/or dividends, while the corporation itself is taxed based on its profits in the previous year.
How Do You Incorporate a Business?
Incorporating your business has a few more complicated steps than simply registering your business:
- Choose and file a name for your corporation
- File the Articles of Incorporation (a document outlining the governance structure of the company and operating statutes and rules).
- Pay the Articles of Incorporation fee
- File a Corporation Operating Agreement (a document that shows the functions of the corporation and its financial decision-making process)
- Publish the news of your incorporation in a local newspaper or news site according to your state’s rules and regulations.
- Obtain any required licenses and permits for your business
Just like registering your business, third party applications like LegalZoom can be used to help guide you through the steps of incorporating your business.
Tax Considerations of a Corporation
You want to be sure you are privy to the different types of tax considerations that come with incorporating your business. If you are incorporating your business, you will likely have to apply for a tax number for your business so that the IRS has an easier time deciphering what taxes you owe. Some business owners may need to apply for an ITIN if they are foreigners who do not qualify for a social security number. You need to make sure that you file the required tax forms with the IRS and that you file for the required tax number or ITIN as quickly as you can (this will save you a lot of headaches during tax season).
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