So,
you’ve done your research and decided to form an LLC or incorporate
your business. Maybe you want to protect your personal savings and
other assets, maybe your financial advisor mentioned you could save
in taxes, or maybe you simply need a legal structure to win a large
client contract. Whatever the reasoning, it’s time to take the next
step for your business.
The
only question is how?
For
the small business owner, this process raises many questions. Where
do I start? How much does it cost to incorporate or to form an LLC?
How long does the process take? Can I form my own corporation or LLC
or is an attorney required?
In this post, I’ll break down the steps required to incorporate a
business or form an LLC, as well as explain the three different
methods: do-it-yourself, legal filing service, or an attorney.
In
most cases, you can set up an LLC or Corporation with the secretary
of state’s office for whichever state you choose as your ‘state
of incorporation.’ And as a general rule of thumb, if your business
will have fewer than 5 shareholders, it’s best to just incorporate
in the state where you actually live or have a physical presence.
The
LLC requires much less formality, while still protecting the personal
assets of the business owners from any liability of the company. For
an LLC, you’ll need to file Articles of Organization or Certificate
of Organization with your state’s secretary of state. While the LLC
is less formal, these documents must contain at least the minimum
requirements as described by state law before they can be
successfully filed (and your LLC processed).
To
form a corporation, you’ll need to take the following steps:
Draft
“Articles of Incorporation” or “Certificate of Incorporation”
The
Articles of incorporation must be executed by a person designated as
“incorporator.” The incorporator must be an adult and doesn’t
need to be affiliated with the corporation in any way other than
merely filing the document. Later, this person will pass a resolution
assigning all rights and duties to the board of directors.
Submit
your articles of incorporation. In most states, the agency
responsible for corporate filings is the Secretary of State (usually
the Corporations Division).
Once the
state office has processed your documents, they will return the
certified documents to the address provided.
Elect a
board of directors: The Incorporator executes a corporate resolution
electing a board of directors assigning all rights and duties to the
board.
Issue
shares: The Board of Directors issues shares to designated
shareholders.
S-Corp:
And lastly, if you want the pass-through tax treatment of an S-Corp,
you’ll need to file IRS Form 2553 with the IRS within 75 days of
the start date of your corporation.
How
long does the process take?
Depending
on the state and its current workload, processing time may vary from
1 day to 3 months. Unfortunately, as states are facing budget issues
and staffing cuts, we are seeing longer backlogs, particularly at the
beginning of the year. There’s also a ‘rush filing’ option,
which in many states must be done via walk-in delivery. If you’re
filing yourself, you can bring the completed forms in person to the
secretary of state’s office. And if you’re using an online filing
service, they will have a courier located near the state office to
bring in your forms for rush service.
How
should I file?
The
three methods for filing your Articles of Organization or Articles of
Incorporation are: do-it-yourself, a legal filing service, or an
attorney. For full disclosure, I am founder and CEO of CorpNet.com,
an online legal filing service, but will hopefully provide objective
advice here, because depending on your specific situation, each
option has its own set of pros and cons.
Do-it-yourself:
In
this case, you can download or request the forms from your secretary
of state’s office, complete, and submit the forms on your own. This
is obviously the lowest cost method (you’ll still have to pay the
state filing fee; exact fee amounts vary by state; for example, in
California it’s $100 for a Corporation and $70 for an LLC for
standard filings). This is a good option if you’re more concerned
about saving money than time, and if you have a relatively high
tolerance for paperwork and minute details.
Online legal filing service:
An online legal filing service will file the documentation for you.
This option is slightly more expensive than filing yourself, but for
some, the time savings is invaluable. Legal documents can be tedious,
time-consuming and fraught with details. Regulations and requirements
vary across states, even down to the little details like paper size,
font size, number of copies, ink color, etc. By turning to a service
that specializes in these matters, you can save yourself the headache
and hassle of learning and staying current on each and every detail.
And you can focus your time and energy on your own business.
Of
course, it’s important to understand that a document filing service
is well… a document filing service. It’s not a substitute for an
attorney, accountant or tax advisor. These service companies cannot
give you specific legal or financial advice for your set of
circumstances.
Attorney:
If
you have particularly complex business needs — for example you have
strict requirements for shareholder structure or stock allocation, or
you’re dealing with millions of dollars up front — you should
retain your own expert counsel to help get you started. An attorney
will be able to assess your situation and provide specific legal
advice. Likewise, a tax or financial advisor can help you figure out
the financial implications in forming an LLC, S Corporation, or C
Corporation.
When
it comes to legal matters, I’ll be the first to say that trying to
save a few dollars up front can end up costing you big in the long
run. Trust your gut; if you feel like you need to bring in expert
counsel, then by all means do so. Just remember that you are able to
file for incorporation or LLC formation without an attorney, and this
could be a reasonable and cost effective way to go. Whatever method
you choose, make sure to pat yourself on the back for taking this
important step for your business and yourself.
