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Do I Need a Lawyer To Incorporate?

Lawyer Providing Guidance

Starting a new small business can be expensive. It is often tempting for small-business owners under financial stress to consider incorporating without an attorney. The good news is that you can incorporate a small business without hiring a lawyer if you:

  • Have the time and skills to research
  • Prepare the paperwork needed to register with the state
  • Can draft the necessary legal documents

Going that way carries risks, particularly personal liability. If you need help structuring your small business or have concerns about correctly drafting the necessary documents, it's usually a good idea to consult an experienced attorney.

An attorney can help you:

Working with a lawyer will ensure the incorporation documents shield you from personal liability for your small business's debts.

Limited Liability Companies vs. Corporations

Unincorporated businesses (like LLCs) and corporations are different in their legal structures and how they're taxed. An LLC provides a more flexible and straightforward structure. LLCs provide members with limited liability protection without the formalities corporations need. LLCs allow for pass-through taxation. Pass-through taxation means the individual members report business profits and losses on their tax returns.

Forming an LLC typically requires:

  • Articles of Organization: This document is filed with the state's secretary of state or a similar agency. It outlines basic information about the LLC, such as its name, address, purpose, and the names of its members.
  • EIN (Employer Identification Number): If the LLC has more than one member or employee, it must get an EIN from the IRS. An EIN is a tax identification number for the business.

In contrast, incorporated businesses are distinct legal entities with more complex formalities. They offer greater potential for raising capital through stock sales. Corporations may face double taxation, as the corporation and its shareholders are subject to taxation. The choice between an LLC and an incorporated business often hinges on factors like:

  • Liability protection
  • Tax considerations
  • The desired level of administrative complexity

What Does It Mean To Incorporate a Small Business?

Incorporating your small business means setting it up as a separate legal entity. A corporation has legal rights recognized by the state of incorporation.

The most significant advantage of incorporating your business, as opposed to running it as a sole proprietorship or a general partnership, is that it shields you from personal liability for debts and other financial obligations. In other words, if your small business cannot pay its bills, its creditors can't sue you for payment, protecting your personal assets.

The two main types of corporations are C corporation and S corporation. Smaller businesses have avoided creating C-corps because it resulted in "double taxation." That is where income is subject to the corporate tax when earned by the C-corp. Dividends distributed to owners are also taxed. If you are self-employed, this means paying taxes twice.

But, in recent years, small to mid-sized businesses that qualify can form S-corps. S-corp income passes through to the owners. The owners report their share of the S-corp's income on their personal tax returns. This avoids the double taxation with C-corps. An attorney can help you determine if you qualify to file as an S-corp.

A small business chosen to incorporate must follow corporate formalities to keep its corporate status. Corporate formalities are rules and guidelines the company must follow. They include:

  • Maintaining corporate bylaws
  • Conducting business under the registered business name
  • Holding annual shareholder meetings
  • Keeping accurate financial and meeting records
  • Keeping its finances separate from its owners

If a corporation doesn't stick to its rules and procedures, the owners might be on the hook for the company's debts. Personal assets may be used to pay off the business's debts and financial responsibilities.

What Does a Lawyer Do When a Small Business Incorporates?

When a lawyer helps a small business incorporate, they help the business owners with the following:

  • Considering the tax benefits and personal liability protection
  • Choosing a business name that distinguishes it from other businesses registered in the state
  • Filing the articles of incorporation and appointing a registered agent to handle legal correspondence on behalf of the business entity
  • Drafting corporate bylaws that lay out the rules for the company's operations, including the roles of the board of directors and officers
  • If the corporation issues shares of stock, it must issue stock certificates to shareholders
  • Help identify and get necessary business licenses

A lawyer can be helpful during the incorporation process, especially when issuing stock to shareholders. When a company issues stock, it must follow securities laws and regulations. When a small business incorporates, it's often a closely held corporation, which might be exempt from some of the stricter securities rules.

Consult with an attorney to confirm your business's specific status. An attorney can help navigate the complexities of issuing stock per the law. This cautious approach safeguards your business and its shareholders, offering clarity and legal assurance as you establish your new business entity. So, it's wise to seek legal advice to ensure you qualify for exemptions and meet all legal requirements when issuing stock to shareholders.

Pre-Incorporation Agreements

If you are forming a corporation and plan to share ownership, know that owners often sign a pre-incorporation agreement. In a dispute between yourself and the other owners, a contract can often provide a mechanism for resolving them without resorting to costly litigation.

Pre-incorporation agreements usually address such issues as:

  • How much each shareholder will invest in the business
  • How the company will repay business loans made by shareholders
  • What corporate offices the shareholders will hold, and what compensation they will receive
  • The fringe benefits available to shareholders
  • Buyouts when a shareholder leaves the company

Benefits of Incorporating

Incorporating your business offers many benefits that can significantly impact its long-term success and protection. One of the biggest advantages is asset protection. Your personal assets are shielded from business debts and legal liabilities. This means your personal wealth remains separate and secure in the unfortunate event of financial trouble or lawsuits.

Incorporation also lends credibility to your business, potentially attracting more customers and investors. You can lower your personal income tax by deducting business expenses and accessing lower corporate tax rates. Plus, it makes it easier to transfer ownership and sell shares of stock. This is great for those looking to grow and attract investors.

Do You Need an Attorney's Help With Incorporation?

A local attorney can help determine whether incorporating is the right choice for your small business. They can guide you through the incorporation process, ensuring you've covered all essential aspects to safeguard your assets and prevent potential issues.

A legal expert can assist you with startup paperwork, like registering your business name and filing articles of incorporation. A business lawyer can also help you understand your new obligations, like annual reports and tax filings.

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