5 Most Common Incorporation Questions Answered

Incorporating your company can be a confusing and overwhelming process. Get answers to your most common questions now, before you get started.
CEO, MyCorporation.com
February 14, 2013

While every business is different, most people who are looking to incorporate tend to have very similar concerns about the process. Incorporating entails giving up some control over a business, so these concerns are understandable—obviously, you don’t want to rush into something that can wind up costing you hundreds of dollars only to find that you don’t like running a corporation. Over the course of my career as CEO of MyCorporation, I have helped hundreds of small-business owners incorporate their businesses. Most of these small-business owners come with a laundry list of concerns and questions, but I've noticed that five questions tend to come up more than any others. Here are answers to the five most frequently asked questions about the process.

1. Can I incorporate in a different state?

Nevada and Delaware are the most popular destinations for owners looking to incorporate outside of their home state. The incorporation process turns your business into a separate legal entity, and it can thus "live" in any of the 50 states. Only a handful of states, Nevada being the most well known, charge no corporate income tax. Delaware does not collect a corporate income tax either, provided the corporation is only formed in Delaware and does business outside of the state. All corporations will still have to pay the federal tax on corporate income, but losing the state-level burden is very appealing. However, be aware that if you do incorporate outside of your home state, the state you do business in will see your business as a "foreign corporation"—that means you will be liable for heavier fees and will have to fill out a different set of forms. The expenses and hassles of incorporating outside of the primary state of business may outweigh the money saved on corporate income tax, so consider your options carefully.

2. Are there different types of corporations?

The two most common types of corporations are C-Corporations and S-Corporations. The C-Corporation is what most people understand a corporation as being—it is a distinct legal entity taxed separately from its owners. After incorporating, shareholders can also elect to form an S-Corporation, provided the business meets certain requirements—the three main requirements are that the business only issues one type of stock, has fewer than 100 shareholders and the shareholders are all U.S. residents or citizens.

3. Will incorporating save me money on taxes?

C-Corporations are taxed separately from its owners, so your income is whatever your dividends are as a shareholder. However, that means your profits will be taxed twice—once for your corporation’s income, and once for your own, personal income. S-Corporations, on the other hand, have a "pass-through" tax structure, meaning any income the corporation earns is simply passed through, untaxed, and is distributed to the shareholders proportionate to how much of the company they own. The shareholders are then the only ones taxed. 

4. Do I still need to apply for anything else?

Incorporating your business does not excuse you from filing any additional paperwork necessary. Just as with any other business, you still have to apply for the licenses and permits required by the industry you work in and the laws of where you do business. You must also apply for an EIN number, register your business’s name and begin filing annual reports.

5. Will I still control my business?

The answer to this question is a bit more nuanced. As a business owner, you will likely be one of the primary officers tasked with running the corporation. However, you have a fiduciary duty to your shareholders—any decision you make must take profitability and the effect on the corporation’s shareholders into consideration. Chances are, as a small business, you will not be publicly traded, but will instead remain a private corporation. So, when you are approaching investors to offer stock, remember that they may also require certain concessions before they invest.

Choosing to incorporate can be a great idea under the right circumstances. It separates you and the business, meaning if the business goes under you will not be responsible for its debts. Incorporation also allows you to raise money by selling stock. However, you should take the issues of taxation and control into consideration. If raising money through stock is not that important to your business, but you still want the protection of a corporation, look into forming an LLC instead. However, if you're willing to relinquish a bit of control and operate within the rigid hierarchical structure of a corporation in exchange for easier access to investors, a corporation may be a good fit.

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OPEN Cardmember Deborah Sweeney is the CEO of MyCorporation, a company that specializes in helping to form an LLC or corporation. Find her online at mycorporation.com and on Twitter @deborahsweeney and @mycorporation.

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CEO, MyCorporation.com