Incorporating an LLC: A Simple Guide

ByJulija A.
June 24,2022

Every business owner hopes that their business is sustainable and can grow. While expansion from an LLC to a corporation isn’t the end goal of most owners, it’s a sign that the company is growing. For one thing, incorporation gives businesses access to more funding from external sources.

Incorporating an LLC is no small task, but not to worry; we’ve got all you’ll need to know covered in this guide. 

LLC vs. Corporation

First, let’s make a distinction between limited liability companies and corporations.

Limited Liability Company

A limited liability company is one of the most common options for small business owners. That’s because it offers protection from liability, is flexible to manage, and also gives great tax advantages. Such a company exists as a legal business entity, separate from the affairs of its owner, hence the name - limited liability company.

This means that LLC owners cannot be held liable for any debts or liabilities related to the business. Personal properties are unaffected in the event of bankruptcy, which is a pretty substantial advantage, especially with how volatile going into business can be. LLCs are straightforward with their structuring, which can make business operations smoother.

Another simple-structured option is a DBA, also known as Doing Business As. It’s a side conversation, but be careful not to mix them up. As similar as they may be, DBA vs. LLC comparisons will show you just how different they can be.

Let’s talk about taxes for a moment. Operating an LLC means you get pass-through taxation, which means that tax is not levied at the entity level. Income or losses made by the LLC are passed through to the owner. The owners must then report these on their personal tax returns and make any necessary tax payments.  If there is more than one person running the business, a tax return must be completed. 

LLC tax benefits are just one reason to open this type of company. Other advantages of an LLC are raising credibility (an LLC is more likely to be considered trustworthy than a partnership or sole proprietorship) and having limited compliance requirements. 

Putting LLCs one up in the sole proprietorship vs. LLC debates, limited liability companies do not have to endure the strict compliance requirements that sole proprietorships and other business types (general partnerships and even corporations) face. 

On the flip side, however, the disadvantages of an LLC cannot be ignored, either. For one, this type of company generally costs more to establish and run. In some states, you will have to pay an initial formation fee, and many others charge annual report fees, franchise tax fees, or other levies.

Additionally, transferring ownership of a limited liability company is tough work. It is usually seamless only when all the members agree to add new members or alter how much each owner has. LLCs also have a hard time getting credit facilities from banks and other financial institutions, and when they do, they are usually secured with personal wealth as a guarantee.

Corporation

Creating an LLC might be simpler, but corporations also have their advantages. You can choose to form either of the two corporation types; a C corporation or an S corporation. 

S corporations are pass-through entities, so establishing them isn’t that much different from forming an LLC. S corporation owners are taxed on the corporation’s profits and losses. On the other hand, C corporations are taxed at the corporate level, meaning the tax accrued is corporate income tax, separate from the business’s owners. 

Advantages of Running a Corporation

C corporations are the most popular corporation types. This is because they have the distinct advantage of profits remaining within the business, eventually being paid out as dividends to the shareholders. Raising capital under a C corporation is also somewhat easier, as they can issue shares to public buyers.

Another advantage of corporations has to do with excess profits. There is more flexibility with the extra profit made by corporations, as opposed to the LLC business model. All the income earned in a limited liability company goes back to the owners but in S corporations, income (and losses) are passed on to shareholders, who will then report it in their individual tax returns.

This means that S corporations do not pay corporate tax, meaning they have fewer expenses and can save more money (for context, corporate taxes are usually higher than ordinary taxes). As a bonus, if the corporation can meet some regulations, dividends paid are also tax-free.

Disadvantages

Corporations are not without their disadvantages. C corps face double taxation, as they are also required by law to remit a portion of their income as federal corporate tax annually. That’s another deduction from shareholders' earnings. 

While having a good structure is great, it also comes with many formalities. To run a corporation legally, you must have an appointed board of directors, and schedule and hold board and shareholders’ meetings, among other structural and managerial requirements. In a nutshell, incorporating means spending more on expenses.

Steps to Incorporating an LLC

Before we dive in, if being taxed as a corporation is what you seek for your limited liability company, then there is a way to go about that without needing to incorporate. Incorporating LLCs can be tricky, and there is no reason to do it if all you seek are tax benefits. 

Just file an IRS Form 8832 or IRS Form 2553, and your business will receive tax status as a C corporation or S corporation, respectively.

If incorporation is truly your end goal, however, then there are two ways to achieve this conversion:

  • Statutory merger
  • Statutory conversion

Incorporating an LLC through a Statutory Merger

Statutory mergers are especially useful when an LLC operates in a state like Arizona, which prohibits the other method of incorporation; statutory conversion. To convert by statutory merger, your LLC would need to:

1. Form a New Corporation

Becoming an LLC with full incorporation status would require the creation of a new corporation. You would have to file a Certificate of Incorporation to the Secretary of State.

2. Merge the New Corporation and the LLC Together

Next, you should begin a merger process between this new corporation and the LLC. As the LLC is absorbed into the company, ownership percentages are converted into shares in the new corporation.

Incorporating an LLC through Statutory Conversion

Using statutory conversion to make your business an LLC with corporation status is the easiest incorporation method. However, as mentioned earlier, some state laws do not allow it. In the states where it is not prohibited (say, California), the process isn’t always the same but does follow a similar pattern. To incorporate an LLC using statutory conversion, the owners must:

1. Unanimously Agree To Incorporate

There has to be a mutually agreed-upon plan for the incorporation. All members should typically be on board with the decision to incorporate the LLC, or it will not be a smooth conversion.

2. File a Certificate of Conversion to the State

Next, you must file a certificate of conversion to the state and other documentation such as the articles of organization of the LLC.

3. Issue out Shares to the Public

Issuing shares is the next step. As mentioned earlier, all ownership percentages will be converted into shares. This enables the business to issue shares to investors and the general public. Once the conversion is completed, the limited liability company is dissolved and is now a corporation.

Incorporating an LLC is challenging, but it can be made easier by getting a company that can help you with your LLC. Besides setting up an LLC and helping save you resources, LLC services can help you avoid mistakes while preparing and submitting your paperwork.

What Happens if I Can’t Incorporate My LLC?

It is a very rare occurrence, but if you fall under the category of LLCs that can’t be incorporated either by statutory conversion or merger, you may have to use a different tactic. This alternative method is called a non-statutory conversion. Being the last resort, though, it is a very complex process. You should contact the services of an experienced tax lawyer.

What Will Happen After an LLC Is Incorporated?

Now that your LLC is incorporated, what changes? Here’s what you should expect with the incorporation:

  • A board of directors will be appointed.
  • A certificate of incorporation will be submitted to the state.
  • Business operations will adopt corporate bylaws.
  • Annual board meetings and annual shareholders’ meetings will be held to make resolutions to key decisions. Meeting minutes will also be taken.
  • Stock certificates will be issued to shareholders.
  • The business will start paying corporate tax.
  • Annual reports will be filed with the Secretary of State. Reports vary by state, but you can expect to include the company’s name and address, details of directors and officers, tax identification, business purpose, number of issued shares, and all authorized signatories or registered agents.

Again, enlisting the help of a capable LLC service makes all these new processes and changes easier to get through, so unless you know what you’re doing, it’s highly advised to get one.

FAQ
What kind of documents do you need to open an LLC?

Necessary LLC documentation includes:

  • Internal Revenue Service (IRS) Form SS-4 (which is used to apply for an Employee Identification Number),
  • Articles of organization,
  • Operating Agreement,
  • Name reservation application,
  • Tax registrations,
  • Business licenses (such as home occupancy permits, premises permits, and professional licenses),
  • Initial and annual reports.
What is the organizational structure of an LLC?

LLCs typically have two types of management structures. The first is a member-managed structure in which the business is managed by one or more members. Under the second type, a manager-managed system has the business’s affairs overseen by an appointed manager.

In member-managed LLCs, all members have the authority to make binding decisions for the company. Members of manager-managed LLCs can make structural decisions in the company, such as choosing who the manager will be, but they cannot make binding decisions.

Do LLCs get any tax benefits?

LLCs are taxed on a pass-through basis, meaning earnings are passed straight through to owners, and they don’t need to pay corporate federal income taxes. Instead, taxes are paid as personal income taxes. 

LLCs also have tax flexibility, meaning they can choose how they should be taxed: as S or C corporations or as a sole proprietorship and partnership. Ultimately, the benefits are tax flexibility and being taxed at lower rates.

How many people are needed to form an LLC?

Only one person is needed when incorporating an LLC company. Even though it’s not a common occurrence, many LLCs in the US are run by individuals.

About the author

Julia A. is a writer at SmallBizGenius.net. With experience in both finance and marketing industries, she enjoys staying up to date with the current economic affairs and writing opinion pieces on the state of small businesses in America. As an avid reader, she spends most of her time poring over history books, fantasy novels, and old classics. Tech, finance, and marketing are her passions, and she’s a frequent contributor at various small business blogs.

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Virtual assistants provide administrative, technical, or creative services to clients from their home offices. For this role, you’ll need excellent organizational skills and a willingness to dedicate time and effort to finding the right clients. You will also have to compete with some established virtual assistant companies, but if you focus on smaller businesses and entrepreneurs, you’ll be able to make more than a decent living with this option. Offer Event or Wedding Planning and Organization When it comes to profitable eCommerce business ideas, providing wedding and event organization is another service you can promote and book online. Not everyone has the time or creativity to organize everything for their big day, company outing, or kids’ party.  This is where your eCommerce site comes into play. You can offer services online and allow your customers to book through your eCommerce store.  For this to be successful, you'll need to create a large network of vendors, caterers, and other third parties. However, if you already have such service providers standing by, this business could be the right idea.  No Clients Needed If you are an introvert and prefer not to deal with clients or customers, you can still make money online. There are excellent online eCommerce business ideas you could pursue, so let's discuss those as well. Start With Affiliate Marketing Affiliate marketing is a type of online marketing where you promote other people's products and earn a commission on any sales that you generate. This can be a great way to make money online if you're able to drive traffic to your affiliate links. Just be sure to choose products that are relevant to your niche and audience. So, where do you start with affiliate marketing now that you’ve chosen it among other ideas for an eCommerce business on our list? You could create a blog, social media account, or YouTube channel where you review products from an array of brands. Having a niche market, you can tap into through your blog or account can be a great way to earn affiliate commissions, as well as build up your own brand and authority. You'll need to invest some time and effort into creating high-quality content, but if you can build up a large following, you'll be able to make a great living reviewing products online. Launch a Dropshipping Business Another excellent choice that belongs to the easy eCommerce business ideas category is launching a dropshipping business. When you dropship, you simply sell products sourced and fulfilled by a supplier. This can be a great way to get started in eCommerce with little or no investment. You just need to find a reputable supplier and set up your eCommerce store. Once you've got everything up and running, it's just a matter of driving traffic to your site and making sales. You'll also be responsible for customer service and ensuring that your shoppers are having the best experience. After all, 91% of customers will simply leave and never return if they have a bad experience with your store, which is something new businesses cannot afford. Bottom Line There are plenty of ideas for an eCommerce business that involve selling products or services. So, if you're looking to get started in eCommerce, be sure to choose the option that best suits your skills and interests. Moreover, take a closer look at the professional network that you’ve built up over the years and then decide which avenue to pursue. With commitment and effort, you can start making money online in no time!
By Vladana Donevski · June 23,2022
The documents for incorporation differ by state, and the nature and type of the business looking to incorporate. In the United States, Corporations and Limited Liability Companies (LLCs) are the two main types of business entities, and require different documents to achieve that. In this article, we will learn the differences between articles of incorporation and organization, their components, the filing process, and why they’re necessary. Let’s get right into it! Articles of Incorporation: Definition The articles of incorporation - also known as a corporate charter, articles of association, or a certificate of incorporation - are legal documents filed to establish a company of a specific type as a business entity. In other words, they give the corporation its legal identity. In practical terms, for a corporation to open a bank account, issue stock or shares, operate within a state, and engage investors, it must first file articles of incorporation. In the United States, this is usually done with the Secretary of State or company registrar, depending on the state of incorporation. Delaware and Nevada are the most popular states for registering your corporation, because of their friendly regulations and minimal tax requirements. Articles of Incorporation vs. Organization Most people tend to confuse articles of incorporation with articles of organization, but they are not the same; now that we’ve defined the former, we’ll do the same for the latter. The articles of organization are filed at the point of creating an LLC. In terms of function and components, they are no different from articles of incorporation. However, the regulatory requirements are different and might be stricter, depending on the state and industry the business is in. These are the primary thing to research for prospective owners learning how to incorporate their business. The next step is filing your articles, so it’s time to learn how it works. Filing Articles of Incorporation The Required Documents The components of documents to be provided upon filing articles of incorporation vary by state, but many of them are the same everywhere. Most of these components will be on the face of the certificate of incorporation, and they include: The corporation’s name and address The name and address of the registered agent responsible for accepting legal documents on behalf of the corporation; some states may require a formal agreement of the agent’s acceptance of this responsibility. The number and type of authorized shares; more details on this can be found in the articles of incorporation and their bylaws. The type of corporate structure (e.g., profit, nonprofit, etc.) The names and addresses of the founding board members The names, signatures, and addresses of the persons handling incorporation; a corporation can have multiple incorporators who do not need to be directors or stockholders. If applicable, the lifespan of the corporation, as some corporations are made to exist for a limited time and carry out a particular function. The number and type of stocks the corporation can issue. Other components which are not required, but can be included, are: The limitation of directors’ liability Stockholder actions The assignment of authority to call stockholder meetings The purpose of incorporation, which may not need to be specific, depending on the state. The Filing Process The end goal of filing is to receive a certificate of incorporation. After preparing the documents, the incorporator should schedule an appointment with the designated filing agency of their state. Procedures differ between states, but generally begin with paying a filing fee after submitting the required paperwork. The process is completed upon acceptance of the paperwork and approval of the corporation’s registration. In most states, corporations must have both articles of incorporation and bylaws, even though bylaws are not to be filed. Bylaws only serve as internal documents setting out the rights and responsibilities of a corporation’s shareholders, directors, and other officials. Benefits of Incorporation Corporate Brand Identity Customers are more inclined to trust and do business with a brand when its corporate identity is established, as are investors. Banks are more likely to finance your venture if it’s an official business, and you’ll certainly look better in the strict due diligence checks on your business. Where no official or formal records are found, chances are that funding will disappear for lack of confidence in the safety of investing in you. Tax Advantages A corporation’s tax liability can be reduced depending on the state of incorporation. This tax reduction is often justified through operational costs like insurance, green energy investments, employee retirement benefits, production costs, employee wages, etc. Separation of Liability Filing your articles of incorporation separates the corporation's liabilities from those of its owners, in events of criminal activity, injury, or loss. The owners’ personal assets cannot be seized, auctioned, or sold if the business goes into debt. On the other hand, owners of unincorporated businesses are at risk of losing personal property in such situations. Protection of the Business Name Before an applicant is accepted, the state of incorporation will conduct a search to ensure that no other existing business or corporation has the same name. Applications for companies with an already taken business name won’t go through, because those names are protected - but only if their owners incorporated in time. Business owners also have the right to seek legal consequences for infringement of this protection. Perpetual Existence For businesses with no preset lifespan, the articles of incorporation guarantee longevity and perpetuated existence. This means that, in the event of withdrawal or death of one or all owners, the business remains in existence. By extension, a transfer of ownership is an option for incorporated entities. Unincorporated entities suffer a different fate and cease to exist in such situations.
By Vladana Donevski · June 30,2022

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