Incorporation is the process of legally establishing a business entity. Incorporation creates a separate legal entity that can enter into contracts, own assets, hire employees, sue and be sued, and pay taxes. Corporations offer owners limited liability protection, ensuring that shareholders’ personal assets cannot be seized to pay for debts or lawsuits incurred by the corporation. Corporations also have a perpetual life and can continue to exist after the death, incapacity, or withdrawal of its owners/shareholders.

While corporations have many benefits, they are not right for every small business. They can be complex to set up and maintain due to extensive paperwork and adherence to numerous regulations. They can also be expensive because of ongoing administrative costs to comply with federal and state tax procedures. Additionally, corporations are subject to double taxation, meaning that profits are taxed on both the corporate level and again when they are distributed as dividends to shareholders.

The first step in incorporating is drafting articles of incorporation. These documents outline the company’s structure and ownership and are filed with the state. Once the articles are approved, the next steps include naming the company, appointing a registered agent, and preparing a draft of corporate bylaws. As a small business owner, it is important to seek guidance from a business lawyer and tax professional before beginning the incorporation process to ensure that all requirements are met. This will prevent any potential delays and penalties down the road.