Congrats: You left your staff job to strike out on your own.
One of the first decisions every solopreneur must make is what type of business they want to create. Why does it matter? The type of company determines how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. (Check out the U.S. Small Business Administration’s Guide to Choosing a Business Structure and consult an accountant and or an attorney if you have questions about the process.)
If you decide that a corporation is the best for your needs, follow these steps:
Step 1: Name Your Company
Brainstorm a few options that are descriptive and memorable. Then, you check with your state’s corporate filing office as well as federal and state trademark registrars to see if it’s available.
Step 2: Figure Out Your HQ Location
Select a state as your headquarters’ location. (This doesn’t necessarily need to be where you live or even where you expect to do the majority of your business.) Different states vary in cost to incorporate, taxation, and corporate laws. Consult with a lawyer or an accountant to weigh your options.
Step 3: Pick a Type of Corporation
You can incorporate your business as a C Corporation, an S Corporation, or a Limited Liability Company (LLC).
- C corp: A corporation, sometimes called a C corp, is a legal entity that’s separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable. Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other business structures. Corporations also require more extensive record-keeping, operational processes, and reporting.
- S corp: An S corporation, sometimes called an S corp, is a special type of corporation that’s designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates. S corps must file with the IRS to get S corp status, a different process from registering with their state. There are certain limits on S corps; see if you meet the criteria to file as an S corp.
- LLC: LLCs protect you from personal liability in most instances, your personal assets—like your car, house, and savings accounts—won’t be at risk in case your LLC faces bankruptcy or lawsuits. Profits and losses can get passed through to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.
Step 4: Select Your Company Directors
A corporation is required to have a board of directors who are effectively responsible for running the corporation.
Step 5: Determine the Type of Shares
Select the type of shares your corporation will sell to stockholders. In many cases, corporations are private, limiting the availability of the shares to only a few people, like your directors.
Submitting the articles of incorporation to the state, along with the registration fee. You can file the paperwork yourself, through your attorney, or use a third-party service.
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