Why Incorporate Your Business?
As your small business begins to grow, you need to consider taking steps to protect your personal assets and your financial future. If you are registered as a sole proprietor, then you bear the full financial and legal liability for any debts or actions associated with your business. In the event that your business incurs an unmanageable amount of debt, your personal assets, such as your house and your car, will be seized and sold off.
Unlike sole proprietorships, incorporated businesses offer limited liability protection to individual shareholders. As a shareholder your personal finances, including your credit, will not be directly affected by the profits or losses of your business. In the eyes of the government, a corporation is a distinct entity similar to an individual; a corporation can own property, conduct business, and incur liabilities. If you believe that you and your business will benefit from incorporation, then it’s time to follow these steps.
1. Choose a Name for Your Business
As a corporation, your small business must have a name that is distinct from every other incorporated business entity. Your name needs to indicate your incorporated status. Common designations such as “Corporation,” “Incorporated,” or “Limited” are acceptable in many states, as are the abbreviations Corp., Inc., and Ltd. You can submit your proposed name to your state’s incorporation office and pay a small fee to have the name held in reserve while you file your incorporation papers.
2. Appoint Directors and File Your Articles of Incorporation
The directors of a corporation are generally responsible for making major financial and policy decisions, such as hiring corporate officers, authorizing the issuance and sale of stock, and approving loan requests. Some states will allow a corporation to have a sole director regardless of the number of owners, and although owners often appoint themselves to be the directors of their corporation, a director does not need to be an owner.
Now that you have chosen a name and a board of directors, it is time to file the official “articles of incorporation.” For single-owner corporations, the sole owner simply prepares, signs, and files the articles of incorporation, and typically the paperwork can be completed and filed in a single day.
3. Drafting Bylaws
The bylaws of a corporation indicate how the business will function day-to-day. Typically, bylaws are proposed and adopted by the directors at the first board meeting. Even if you are the sole owner of your corporation, it may be beneficial to adopt bylaws in order to show investors or potential partners how your business operates.