Why should you incorporate and how long does it take?

There are many business structures available to startups and ecommerce sellers including LLCs and corporations. The best business structure for any business owner hoping to grow their company, raise venture capital funding, and protect their personal assets from liabilities incurred by their business is a corporation.

In this article, we'll help you weigh the benefits of incorporation. We’ll explore the similarities and differences between LLC and corporation structures and including their unique tax and management structures, distinct maintenance requirements, and how each structure can impact your funding viability.

Corporations offer strong legal protection and are appealing to investors. They are ideal for startups planning to grow or raise capital. You can also form an LLC for more flexibility and simplicity, and opt to be taxed as a corporation later. You have to consider your goals for fundraising, your business’s liability, and the compliance requirements of a corporation.

A corporation is a business structure that is a separate legal entity from its owners. It is created by filing articles of incorporation with the Secretary of State in a chosen location, and is a highly regulated type of business structure.

The Internal Revenue Service (IRS) imposes regulations on corporations that create predictable legal criteria under which the company must operate. These regulations make corporations more attractive to investors, who are often attracted to their predictable nature.

While the investors who choose to fund startups are often comfortable with a certain degree of risk, the more factors that contribute to predictability the better. Predictability increases the likelihood of an investor receiving a return on investment.

Plus, in some cases, investors are legally only able to invest in corporations. Any founder looking to get funded by venture capital firms should incorporate for this reason alone.

Below, we’ll define the characteristic ownership, management, and tax filing requirements of corporations to give you the full context of their benefits.

• Ownership: C- and S-corporations are owned by shareholders. Shareholders do not have to be owners to the business or involved in the business’ general operations. Shareholders generally participate in annual shareholder meetings and vote on major decisions such as changing the company’s constitution, declaring dividends, or liquidating the company. 
• Management: Corporations have strict management and maintenance structures. First, there must be a board of directors that aims to increase company profits. Next, there must be separate officers to manage daily operations, such as a CEO, CTO, or COO. Founders must also write and abide by the bylaws of the corporation, maintain comprehensive documentation, hold annual shareholder and board meetings, and file annual reports to the Secretary of State. 
• Taxation: A corporation is taxed as a distinct entity from its owners, who pay taxes on their personal filings. Corporations are taxed on business income and any dividends paid are also taxed (this is known as double taxation). S-corporations can opt to file as a pass-through entity but the default is to file as a distinct entity.

Limited liability companies (LLCs) are a sort of hybrid between corporations and sole proprietorships, born out of a gap in the business formation environment.

Corporations are highly regulated distinct entities; sole proprietorships are notably flexible. Corporations are considered independent entities and provide business owners with protection over their personal assets if their business is faced with a liability; sole proprietorships are not independent of their owners, and business owners are responsible for all liabilities.

LLCs draw features from each of those business structures to offer a middle-of-the-road structure with the operational flexibility and legal entity distinction of a sole proprietorship and the limited liability protection of a C- or S-corporation.

For LLCs, the limits of this liability extend to the amount that members invest in the company. If your company owes on a lawsuit which it can’t afford to pay, your personal funds will only be drawn up to your investment amount, if at all.

• Ownership: LLCs are owned by members of the LLC with equity. “Member” in this business structure means owner. Each member’s percentage of ownership is determined by LLC members. 
• Management: LLCs have great flexibility when it comes to management. They can be either member-managed or manager-managed. Member management means that one of the members is running the operations and maintaining the business’ legal requirements, whereas manager-managed means that a non-owner is hired to handle these responsibilities. LLCs can be run by an individual or group, as determined by the members. Together, members also form an operation agreement against which to uphold operational standards. 
• Taxation: By default, LLCs are taxed as a pass-through entity. A pass-through entity is taxed on the LLC members’ income rather than the company’s income. The IRS considers LLCs (and sole proprietorships) to be disregarded entities, which means that they are taxationally indistinct from their business owner(s). As a result, the income of the business is passed through to the business owner(s), who then pay tax on behalf of the company. 

LLCs can elect to be taxed as S-corporations if the members prefer not to use the standard pass-through structure.

A defining characteristic of both LLCs and corporations is the provision of limited liability, which is a part of the corporate veil. This is one of the most important characteristics that LLCs share with corporations. This veil creates a distinction between your personal liability and the company’s liability, which helps protect your personal assets from being impacted by any business charges or debts. In other words, you shouldn’t have to pay out-of-pocket for your company’s costs. Both business types need to maintain their limited liability by adhering to legal documentation and filings for their business.

For LLCs, the limits of this liability extend to the monetary amount that members have invested into the company. Let’s say a member invested $10,000 in their LLC and the LLC owes $150,000 on a lawsuit. If the business is not able to cover the cost, then the member will only be potentially liable for $10,000 on that suit due to the protection of the liability limit.

Corporations have the same protection. This means that the corporation’s employees’ and officers’ personal assets, including homes, boats, bank accounts, or cars, will not be seized in order to pay off liabilities that the business incurs.

This corporate veil can be pierced, which opens owners up to personal liability. It’s of personal and professional interest to fortify your company’s corporate veil as much as possible. You can do so by remaining compliant, keeping documents accurate and up-to-date, and maintaining segregation of your personal and business finances.

Here’s a table of key differences between LLCs and corporations that you can use as you decide your business structure.

Corporations may require more work and money to maintain than sole proprietorships or Limited Liability Companies (LLCs), but they come with several benefits.

Incorporating your startup creates a legal entity that’s entirely separate from your personal finances and can save your personal assets if you encounter a business-related lawsuit. It offers stronger protection than you might receive from a sole proprietorship or an LLC. You can think of incorporation’s protections as a "liability shield.” Many corporations opt to incorporate in Delaware because of its established corporate laws that are very business- and tax-friendly. 

Another reason to incorporate is if you plan on raising capital. Because of their legal requirements, corporations are often trusted more by investors. In some cases, investors are required to invest in corporations and not other business structures. Corporations can also conduct activities that help investors, like issuing stock.

Incorporation is also an attractive option if you plan on eventually selling your company or taking it public because you can easily sell shares to transfer ownership to new business owners.

Not sure what type of business structure makes the most sense for your company? Here are some common factors that can influence your decision.

There are several preliminary steps to take before you file for incorporation with your state business agency. The amount of time this process will take depends on factors like the complexity of your business and how much time it takes for you to put together your paperwork. If your business is relatively small and its structure is simple, you can complete these steps in just a few business days. If your business is more complex, it might take longer.

1. Decide on a corporation type

First, you’ll need to decide if you want to incorporate. You can form a C Corporation, B Corporation, or S Corporation. You can also form an LLC and opt to be taxed as a Corporation. 

Here are your options:

2. Find a corporation name

Your corporation needs to have an official name. Many states have databases that you can parse to make sure you're not infringing on another business' name. Some states also require that you have "Corp," "Corporation," or some other variation in your business name. Check with your state's business agency to be sure of these requirements.

You don't need to worry too much about finding the perfect name from the start. You can always file for a doing business as or DBA to use a different name down the line. This is also known as a "certificate of assumed name" in some states.

3. Get a registered agent

A registered agent serves as your point of contact with the state where your business is registered. You can act as your own registered agent if you live in your business’ registered state. If you don't want that responsibility or don't live in the state where the corporation will be registered, you'll need to find or hire someone to serve as your registered agent.

4. Write up bylaws and articles of incorporation

Articles of incorporation are the official formation documents you must file with your state to start a new business. You can hire a business attorney to draft your articles, write them yourself, or use a template.

If you plan to form an LLC, these documents are known as articles of organization. You can opt to be taxed as a corporation either immediately or further down the road.

Additionally, you might want to spend some time gathering your corporation’s bylaws. If your business was structured as an LLC, these bylaws will be known as your operating agreement.

Your bylaws are your company’s handbook on aspects like its management structure. They’re primarily used for internal purposes. You don't need to file these bylaws with your state business agency, but they’re important documents to have because organizations like financial institutions can request to see them.

5. File articles of incorporation

Once you’ve prepared your articles of incorporation, it’s time to file them with the state. If you’re opting to be taxed as an S corporation, you’ll need to file Form 2553 with the IRS after your articles have been accepted by your state.

Double-check the requirements for filing articles of incorporation in your state in case there are any procedures specific to your area. For example, the state of Nevada requires that businesses identify the names and addresses of everyone on their board of trustees when they file; this is not common practice in other states.

Ensure that you're able to meet the requirements of incorporation in your state before you submit the paperwork. That way, your filing won't be denied and you can launch immediately after your paperwork is approved.

6. Wait for approval

Without incorporating, your business is prohibited from performing key activities like applying for grants and funding.

We recommend contacting your state's business agency before you file to find out the current processing times. This can help you decide whether you'd like to pay an expedited filing fee ahead of time. The expedition may be more difficult once you've already filed.

Once your state business filing agency receives your articles, they’ll need to check that your paperwork has the required elements, such as a registered agent, a business name, and the number of shares you'll issue. If it's not approved, you'll need to add the missing information and resubmit your papers.

Standard processing times

The amount of time it takes for incorporation varies by state. In most states, you can expect it to take about seven business days.

Some states such as Rhode Island and Kansas can process paperwork in as little as two days. Other states can take much longer, such as Alabama (66 business days) or North Dakota (30 business days).

However, these processing times aren't guaranteed. If a filing agency is slammed with a lot of requests, for example, processing times can take even longer. This often happens during popular filing times such as the end of the fiscal year or the end of the calendar year.

You may be able to cut down on the time you spend waiting for approval by ensuring that you have all the details and papers your state requires for incorporation.

You can also call up your state filing agency to check on expected processing times before you file. That way, you can decide whether or not to pay an expedited filing fee.

Options to speed up the process of incorporation

Many states offer the option of expedited filing. If you pay the fee, you can expect to have your articles of incorporation approved in as little as two business days.

Some states offer multiple levels of expedited filing. For example, the West Virginia Secretary of State charges $25 for a 24-hour turnaround, $250 for a two-hour turnaround, or $500 for a one-hour turnaround.

In most states, incorporation costs around $100.

In states like California, this is a flat fee. In other cases, like Nevada, the actual fee ranges from $75 to $35,000, depending on how many shares your corporation has.

These fees are for the standard process of incorporation. If you'd like to expedite filing, that price increases.

Again, the fee varies depending on where you live and how fast you want your papers processed. In Montana, you can get your articles of incorporation approved in as little as an hour if you're willing to pay a $1,000 expedited filing fee. In Michigan, a 24-hour turnaround time will cost you a mere $50.

Once you incorporate, you have to maintain compliance with legal and tax responsibilities. At the state level, you’ll typically be required to file annual reports and maintain a registered agent.

You’ll also file annual income tax returns at the federal and state level, and pay estimated taxes quarterly. You’ll have to pay sales tax where required, and this might include multi-state sales tax filing. Since corporations have employees, you’ll also need to follow state and federal payroll tax laws, and labor laws.

Corporations need to keep detailed records of meeting minutes, ownership records, and any updates to governing documents (such as bylaws). These are essential for both legal protection and future fundraising. Investors or organizations such as the Small Business Administration will look for corporate compliance if you try to raise money or take out a loan.

Compliance can get more complex if you expand into new states or countries. Regular audits, detailed financial reporting, and adequate business insurance can help you minimize risks. 

An LLC might be a good choice if you need operational flexbility and want to avoid double taxation. A corporation might be a good choice if you want easier access to investors and a global market.

If you’re a startup, we’d recommend incorporating.

Corporations have many regulatory requirements. These strict must-haves can seem limiting, but they also offer a concrete element of predictability for potential investors and shareholders.

Since LLCs are member-owned, the business entity is vulnerable if the founders leave the business. Unless it has been legally established that the baton will be passed to another member, the company could be dissolved. On the other hand, if a founder leaves her corporation, it will continue to exist as an independent legal entity. If you choose to structure your business as an LLC, ensure that your startup is set up to last by preparing for this possibility before it arises.

Some businesses choose between corporations or LLCs based on the nature of their industries. For example, an insurance brokerage would likely be more successful as a corporation because of the many regulations that the insurance industry has for businesses. An LLC doesn't necessarily need to comply to these regulations. An entity that holds appreciating assets such as a real estate holding company might prefer an LLC, since it still offers protection for assets but is taxed more flexibly on personal income.

Ultimately, the best decision for your business is an educated one. Be sure to set up meetings with law and tax professionals who have proven experience with these business structures to advise you. They will be able to provide insights that could make this decision easier and wiser.

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