Entrepreneurship is on the rise. The most recent statistics show 774,725 businesses are less than a year old at the end of the first quarter in 2019. It represents the highest number of new businesses created in a single calendar year in more than 25 years.
With so many budding entrepreneurs, there’s bound to be a lot of questions about setting up a business. Many business entities must be incorporated, or registered with the state. To do so, a company must submit proper documents to the state and continue to submit yearly reports to stay in compliance.
Fortunately, there are business incorporation services that can help companies through the process. This guide will explain how a business becomes incorporated and explore various incorporation services that small businesses can utilize.
What does incorporate mean?
To incorporate a business means to register it with the state. To do so, the state requires certain business entities to file formation documents that ask for the company name, company address, and contact information for important people within the business.
Which business entities must incorporate?
The three most common types of business entities are sole proprietorship, limited liability company (LLC), and corporation. A sole proprietorship does not incorporate itself, which is to say that it doesn’t register with the state. If the owner chooses, he or she can create a business name and set up a DBA (doing business as), but the business is not registered with the state officials.
The other two types of business structures, LLC and corporation, must be incorporated.
Which business entity is right for you?
Selecting a business entity can be a tough choice. The structure you choose will affect taxes, corporate organization, and liability protection. It’s always best to speak with a CPA and a lawyer to understand the financial and legal impacts of each choice.
To provide a basic foundation, here’s a look at the differences between three of the most common business entities: Sole proprietorship, LLC, and corporation.
A sole proprietorship is not incorporated with the state. If a person wants to sell goods and collect profits from them, he or she can do that without officially setting up a company through state channels. Profits are considered income and are taxed and there is no liability protection under this structure like there is with others.
A limited liability company offers personal liability protection, which keeps business and personal assets separate. If the business has financial or legal trouble, the owner’s personal assets (like a home or car) can’t be touched. This level of protection is valuable to many business owners.
An LLC is incorporated with the state and is subject to pass-through taxation. In simple terms, that means that the owner pays taxes on the profits on his or her own tax returns. The company is not considered an entity, which means an LLC itself doesn’t pay taxes, just the owner.
A corporation has the same liability protection as an LLC, but taxes work differently. A corporation is considered a taxable entity, so the company pays business taxes and shareholders pay taxes again on their portion of the profits. This is known as double taxation.
A corporation must be incorporated with the state and also has a more strict corporate structure to adhere to. A board of directors must be in charge, bylaws are created to ‘govern’ the company, and annual meetings must be held.
There are other business structures to choose from. These are just the three most popular options. Again, it’s best to speak with an accountant and someone in legal services to discuss specific impacts for your unique company.
How is a business incorporated with the state?
To incorporate a business, the business owner must submit formation documents to the state. For an LLC, documents known as Articles of Organization must be submitted. Usually, the forms can be found online on the secretary of state’s website and submitted electronically.
As mentioned, the form will ask for the company name, company address, and contact information. The form will also ask you to list a registered agent. A registered agent is a person or company that accepts documents on behalf of your company. The documents are usually sensitive, like tax notices or documents served during a lawsuit. Most states allow any person over the age of 18 with a physical address to serve in this role, which can include the business owner. A registered agent service can also be hired to fill this role.
Expect to pay a state fee when you submit LLC formation documents. The fee varies by state and can be anywhere from $50-$500.
For a corporation, the process is the same except the formation documents are usually called Articles of Incorporation. The same information is provided and the fee to file is usually the same.
Once approved by the state, a company is officially incorporated. However, certain documents, usually referred to as an annual report, must be submitted every year to maintain this position.
Incorporation services can help with all of these tasks. Incorporation services, or business formation services, can file your formation paperwork with the state, serve as your company’s registered agent, and file annual reports for you.
To open for business, what else must be done?
Incorporating a business is just the first step. Once that’s complete, there is a laundry list of things to accomplish, which include:
Creating an operating agreement
Every incorporated business, no matter its size or structure, should have an operating agreement. This document explains who makes decisions, how the day-to-day operations are run, and how profits and losses are split up.
This document isn’t submitted to the state. Instead, it serves as a legal document that provides clarifications should questions arise in the future. Some incorporation services offer operating agreement templates that you can use as a foundation.
Obtain an EIN
Incorporated businesses need an EIN or an employer identification number, which is provided by the IRS. To get a unique nine-digit number that your business will use throughout its existence, visit the IRS website. The number is provided instantly after filling out a few questions online.
What’s the number used for? An EIN serves as your tax id number when you pay taxes. It’s also needed to hire employees, open small business bank accounts, or apply for funding.
Open business bank accounts
To make sure your personal expenses are separate from the business, you should open separate business bank accounts. Open both a checking and a savings account. All income collected from the business should go into business accounts and be transferred to personal accounts for compensation. Keeping transactions separate will help during tax time.
Research necessary business licenses and permits
Many states require companies to have business licenses or permits to operate. Before selling anything, check with your state and local government websites to see what you need.
All of these steps are part of the business formation process and many of them can be handled through a business formation service provider.
What services are included in incorporation services?
There are dozens of business formation companies that offer incorporation services to help new and existing business owners. Most offer filing services to handle state-mandated documents or accept important documents as a company’s registered agent. Here’s a closer look at the incorporation services an owner could take advantage of:
State laws prohibit two businesses from using the same name. As a result, before selecting a business name, the owner must run their proposed name through a database. If the name is available, it can be registered with the state. If the name is already in use, another name must be selected.
If a name is available, but an owner isn’t quite ready to file formation paperwork, a business formation company can help reserve a name with the state. For a small fee, usually between $10-$70, a name can be held for 3-4 months.
Filing formation documents
To initially set up an LLC or a corporation, formation documents must be filed. For LLCs, it’s Articles of Organization. For corporations, its Articles of Incorporation. (A handful of states have different names for these documents, but they’re still similar, like Certificate of Organization).
While a business owner can file this document with the state, he or she can also hire an LLC formation service to do it. The company will charge a flat fee to file the document along with the cost of the filing fee, which varies by state.
Annual report services
To stay in good standing, most states require LLCs and corporations to file annual reports. These reports provide updated information to the state and must be filed by a specific deadline. The deadline varies by state. Some states have simple deadlines that require businesses to file an annual report by April 15. Other states have a rolling deadline that falls on the company’s anniversary date. The anniversary date is the date the company registered with the state. A company that registered on May 12, for example, must submit an annual report by May 12 each year.
While annual reports are easy to do, they’re also easy to forget about. If an annual report is missed, the state can charge a late fee or even administratively dissolve your business.
To make sure this report is filed on time, and the accompanying filing fee is paid, many companies choose to work with online incorporation services that offer worry-free guarantees.
Registered agent services
Business formation companies can also be hired to serve as your company’s registered agent. Many business owners hire this job out for several reasons. First, to serve as a registered agent, the person must be available during regular business hours. Some owners travel or have schedules that keep them from being in the office from 9-5 every day.
The second reason people opt for a registered agent service overfilling the role themselves is for privacy. The registered agent address listed on public state records isn’t your home or company address, it’s that of the registered agent service. Plus, having a registered agent means private documents, like lawsuit paperwork, are served off-site and not in your office in front of employees.
Obtaining an EIN
For company owners looking for help getting an EIN, a business formation company can help with that too. For a one-time fee, the company will get the number and provide it to the owner.
Some of the best online incorporation services also offer add-ons or extra features that many small business owners find helpful. For example, some incorporation services can set up a DBA, create company logos, design company websites, provide legal help, or offer banking resolution.
What costs are associated with incorporation services?
As you might expect, costs vary by company. Some companies offer basic services without any frills while others bundle a combination of features into a one-year commitment.
Most business formation services charge a flat fee for one-time needs, like filing Articles of Organization or Articles of Incorporation, reserving a business name, or obtaining an EIN.
Ongoing services, like filing annual reports or serving as a company’s registered agent, are yearly fees. ZenBusiness, for example, will file annual reports for $75 plus the state filing fee and serve as your registered agent for $99 a year. While charges vary, this is a good baseline for comparison.
There are some companies that will file your formation paperwork for free if you sign up for a registered agent service. There are even a handful of companies that will file your formation documents and give you registered agent services free for a year. Charges begin in the second year of service.
Best business incorporation services
Entrepreneurs who are interested in incorporation services will find a dizzying number of options and features offered by each company. To help narrow the search, here’s a look at eight of the best online incorporation services to choose from:
Northwest Registered Agent
Northwest Registered Agent has roots in the industry that stem back to 1998 and many positive business reviews to go with their experience. While the company name focuses on its nationwide registered agent services, the company offers all of the usual business formation services too.
Customers rave about Northwest’s customer service along with available discounts that are available to new business owners.
Incfile is another favorite in the industry. Businesses like the simplicity and value that the company offers in its formation packages. One package offers free filing of incorporation documents and free registered agent service for a year. During the first year, a company only pays for the filing fees. The second year costs $119.
Incfile doesn’t have a lot of add-ons. You’ll only find basic services offered.
ZenBusiness is one of the newest business formation companies on the market, but it’s gaining a lot of attention for its ease-of-use and affordability. Its formation fees start at $49 plus state fees for an LLC. Name availability searches and reservations are $49 plus state fees and obtaining a federal tax identification number is $75.
The company has three different tiers to pick from, each of which offers a different set of services. The Starter Plan, for example, offers filing services, registered agent services, an operating agreement template, and a 100% accuracy guarantee.
Additional add-ons include domain name registration and website templates.
Swyft Filings is an online service that owners can use to set up their small business and file the required state documents. Swyft can help startups register an LLC, C-Corporation, S-Corporation, non-profit, or a “doing business as” (DBA) filing.
EIN registration, amendments, and registered agent services are all available too. The cost for registered agent services is a little higher than most, hovering near $150 per year.
You’ve probably heard of LegalZoom and may have even used it to grab a legal document or two, but did you know that it offers business formation services? It does. Starting in 2001, the company branched out from an online legal platform to offer business services.
LegalZoom can form your business, file all the appropriate annual reports, serve as your company’s registered agent, and as an added bonus, provide legal advice.
For business owners who want to file documents on their own, LegalZoom also offers a Compliance Calendar, which will remind you when it’s to file your annual report. This service is $69 a year.
BizFilings is a big player in the business services sector with more than 20 years of experience in the field.
The online business offers a user-friendly tool to help small business owners pick the best package and has fairly affordable pricing with packages starting at $99 a year.
Business owners will also find a lot of helpful resources on the site, like articles on how to select the best business structure.
Harvard Business Services
Harvard Business Services specializes in Delaware business, so for businesses that are launching in The First State, this is a good choice.
Harvard Business Services has 30+ years of experience and boasts serving 175,000 customers in that time. The company runs sales and offers a full year of registered agent services with any LLC formation packages. It’s also one of few companies that tout Spanish services.
MyCorporation has 20 years of experience in the industry and offers business formation services, trademarks and copyrights, and registered agent services.
While the website looks a bit dated, customer reviews speak highly of the company’s customer support and variety of packages. There are four packages to choose from. The basic package starts at $89 and offers to file Articles of Incorporation, a name availability check, and digital document storage.