Historically times of extreme uncertainty have coincided with an increase in new business formation, this may seem a bit counter-intuitive at first but the thinking is that when the status quo is changing suddenly and unexpectedly, it encourages people to re-assess their priorities and perhaps take a stab at getting that project they’ve always imagined off the ground. This together with an unprecedented government infusion of capital has resulted in the most active period of business formation in the history of the United States.
That’s all well and good, but beyond the numbers, being part of this phenomenon was quite interesting and distressing at times. Rather than falling into the trap of regurgitation of all of the steps for starting a business, I would much rather this be about the experience itself. I feel as though sometimes it can be disingenuous to tell a person what they need to do in order to succeed when what people really need to know is what different paths towards their goals will cost them, and whether or not they are necessary in the first place. There are a lot of things I really wish someone had told me before I started down this path, and I would be remiss if I didn’t share my experience now that I’ve learned some hard lessons along the way.
Throughout this article, I will transcribe certain terms and concepts in bold to draw attention to them. These are the buzzwords and search terms that should help you out if you’re looking to go through the process of incorporation yourself. The idea is that providing these terms throughout the article will give a rough road map for someone trying to plot their own course, and do so without going into so much detail that it becomes overwhelming. Hopefully, it makes for an enjoyable read too!
It is also worth noting that my experience on the subject comes from the formation of my own business, a company I founded to create an official presence for my digital artwork and architectural projects. In addition to this primary function, the company also serves as an insulating entity to protect from any risk assumed along the way. To best achieve these goals I deemed that the S-Corporation designation was most appropriate for me, but this may not hold true for your specific circumstances. Some other popular corporate vehicles include…
C-Corporation: Usually for large corporate entities with lots of shareholders
LLC: Similar to S-Corps, but with income reported as self-employment income rather than wages to an owner-employee.
Sole-Proprietorship: The simplest structure with no legal distinction between the owner and business
Lastly, the account I give in the following paragraphs applies, to some extent, to any business in the US, though it is good to keep in mind that not everything may pertain to your specific situation. Also, the suggestions given herein are just my own opinions, and should in no way be interpreted as legal advice. Talk to a licensed professional before taking any serious steps towards incorporating, it is a significant undertaking and should not be taken lightly.
Part 2: Before you Incorporate
First of all, there is a lot to consider before taking the step to incorporate. How much money do you expect to make through your business? Do you have a comfortable cushion of cash saved up? Do you have a well-thought-out business plan? Even the time of year is worth considering. The Last thing you want to do is get your articles of incorporation filed and then immediately have to turn around and figure out how to file corporate taxes for the year.
The first and perhaps most important step in the process is your business plan. Your business plan will serve as your road map to guide you on your capital venture, and you’ll find that decisions you make along the way will be much easier when you have a clear idea of where your goals are for the company. Speaking from the other side, this is a step that you can’t spend too much time on. Obviously, you have to make it happen eventually, but take all the time you can stand to workshop your ideas first. Practice your pitch with your friends and family, go through one of the many business planning exercises out there on the internet. Even consider taking a class If you can spare the time. While I don’t think that you need a business degree to start a business, you’ll find that often the answers to certain questions won’t be so forthcoming, and it can help to have a little bit of structure to your efforts in these early days.
Business plans aside, and before getting too carried away with the minutia, let’s take a minute to talk about some of the reasons you might want to take this plunge in the first place. It is important to have a clear idea of why people incorporate and what is gained and lost in the process.
Perhaps the most quantifiable measure for making this decision is how much money you expect to make. This is important because the cost of starting a company can be high in both monetary terms and time. The short answer is that the cutoff for minimum projected revenue needs to be somewhere around $80,000 (at the time time of writing) before you will be saving any money by incorporating. Below this threshold, the extra money you pay in income tax on the money you bring in as an individual will be less than the cost of up-keeping a corporation and paying corporate taxes. The reason owning a corporation, and an S-Corporation especially, becomes more lucrative at higher income levels is because distributions are not taxed as regular income. (distributions are payments made directly to a company’s shareholders rather than paid as wages to employees) This matters because typically money that you take as an individual gets taxed at your normal income rate, typically as 1099-MISC income.
Circling back around to the $80,000 number, while it is important to know that there is not much money to be saved below this threshold, there are other circumstances that might nudge you towards this path regardless. One of the most important ones is the added protection that incorporation offers to you and your personal assets. This is because when incorporating you are essentially making a clear legal separation between the person and the business, and as long as you remain in good standing with the government, this relationship will protect each from the other, which is the main purpose of incorporation in the first place.
Part 3: Incorporation
By now you’re probably thinking, wow, this whole incorporation thing sounds pretty complicated, and you may be having some reservations about whether this is really for you or not. If this is in fact the case, you don’t necessarily need to be discouraged, but it may be good to go back and work through the implications of the previous paragraph before continuing further. Take stock of the terms in bold and try to at least have a general idea of their meaning before continuing. Often it’s best not to get too far into the weeds all in one sitting, so If you’re feeling overwhelmed just take a step back and come back to it later. The path to incorporation is measured in a series of methodical steps, and it’s important not to rush through any of them too quickly.
If you’ve gotten this far and still want to trudge onward I would start with (brace yourself) a service like LegalZoom to do the actual filing for you. I know it seems like we’re jumping the gun a little here by going straight to a third party service to do all of our dirty work, but my rule of thumb with paying for services is that the more often you will feel tempted to use a service, the more you should try to avoid using it at all. In the case of filing through LegalZoom, however, the time you save not having to figure everything out yourself will be worth the few hundred dollars it costs to pay another company to do it. And because business formation only needs to happen once, you won’t feel tempted to use the service in the future. Don’t get too comfortable though, because there are still lots of things you need to watch out for while going through this process. Namely, there are a handful of things that you’ll need LegalZoom to do for you and a handful of things they will offer to do for you that you should try to avoid if you’re looking to save money.
To their credit, the service provides a fairly comprehensive business checklist for you after you’ve paid to have them file your articles of incorporation. (The official formation documents for your business.) This checklist is really helpful for getting your head around some of the steps that will follow. Such as applying for an EIN (employer identification number) and holding annual shareholder meetings. (Something that you’ll have to do every year, now that you’re business is registered)
Starting with the EIN, filing for one is a very straight forward process that simply involves filling out a form and sending it, along with a small fee, to your state comptroller. LegalZoom offers to handle this filing for you, but I recommend doing it yourself, as it will get you familiar with directly corresponding with a state agency through the mail, a process that will be necessary from time to time. It’s also really not that bad and you’ll need to have an EIN before you can set up a business bank account.
One thing these services will try and sell you on that you probably won’t need is a registered agent subscription. I would do your due diligence and assess your own situation before making this call, but often this designation is not as critical as many legal services make it out to be. You most likely will not need to use the service and could just as easily designate yourself as your registered agent. You will typically receive one or two documents and then will have very little responsibility from that point onward. You’ll just need to keep in mind is that you are fully responsible for all of the duties of a registered agent, and will need to take seriously any official legal correspondence that may be directed at the business.
Now that you’ve designated your registered agent, your EIN letter in hand, and you have your corporate checklist from LegalZoom, its time to take care of a couple of last loose ends. First, you should create a business bank account using your new EIN and deposit the opening amount you designated in your articles of incorporation. LegalZoom will have more information on this in your corporate checklist, but the short answer is that this sum can be whatever you want so long as your dealing with a freshly formed corporation with no connections to any other entity. If you’re buying or merging with an existing business you’ll want to do a bit more research before coming up with this number.
If you have been careful not to make any purchases other than your fee to LegalZoom and the EIN filing with the state comptroller, you’ll be in a good spot for our next and final step in the incorporation process, selecting an accounting service. I’m afraid that, as with filing the business paperwork, my advice regarding accounting services will be similarly unoriginal. I recommend Quickbooks Online. Not the old desktop program, the online browser-based service that the company is currently putting all of its resources into. I honestly expect to get push-back on this one. (there are other good options that are cheaper) but my experience is with Quickbooks Online, so that’s what I’ll be able to speak to. And, it’s worth noting that my experience has been largely positive.
There are dozens of things to be prepared for however, accounting is a difficult thing to do on your own, but necessary for any independent entrepreneur. It will be a while before most can justify the added expense of bringing on a dedicated accountant. Even if you eventually get to where you can justify the expense, it will be helpful to have an idea of what the role involves.
Furthermore, Quickbooks really does make this process easier, and for this reason, accounting services is the one exception I make to the subscription rule I mentioned previously. The service requires a relativity reasonable $30/month fee (at the time of writing) for its most basic package, and this will be sufficient for any small business endeavor. There is a caveat, however. While the base accounting service is only $30/month, you will be extremely tempted to get the payroll package as well if you are going the S-Corp route. (an additional $40/month) This is because, as an S-Corporation, you are required to at least have one employee with reasonable compensation before you are allowed to take in any kind of revenue. I’ll explain how to get around this second subscription fee shortly, but paying an employee in some form is unavoidable.
The necessity of a payroll service is due to the difference between the owner-employee and the self-employed person. As an S-corp you must have at least one employee in order to do business, and though this employee is in all likelihood going to be yourself, the IRS doesn’t care, and you are required to adhere to all of the formalities that come along with keeping someone on payroll. You are considered both an owner AND an employee. the owner-employee designation is just a useful shorthand, an important distinction to keep in mind when you are describing your relationship to the business in official documentation.
To understand why this distention exists, it’s important to understand why the S-Corporation designation exists in the first place. The S-Corp allows an individual to start a company with a Corporate infrastructure (with a board of directors, shareholders, and corporate taxes and incentives) without having to go through the hassle of filing separately as a C-Corporation every year. You’ll still need to hire a CPA during tax season to make sure you have all your ducks in a row, (a considerable expense in itself) but the process is much more condensed than the alternative.
This is what makes the S-Corporation designation so appealing though. It allows you to take tax exemptions for your business through your personal taxes, potentially opening the doors for significant tax savings that you would not otherwise have access to if you were operating as a sole proprietor or LLC. This topic warrants another article altogether, but a few examples include the fabled home office exemption and the personal vehicle exemption, deductions that can be taken for using a portion of your home for your office, and mileage driven in your car for your business.
This is all great, tax savings for stuff that you have to upkeep anyway? Sign me up, right? Unfortunately, in the early days, you won’t be saving much money if any. However, there is one last area you can cut costs, by excluding the aforementioned payroll service. I won’t go into the details here, but if you’re interested in learning more I have linked an incredibly helpful article for getting around this pesky expense below, bringing one of the most persistent expenses of up-keeping a small business under control and removing the need for another subscription.
The article describes a method for avoiding the normal regular payouts and reporting for wages, social security, and medicare, and instead, making two lump-some payments on a quarterly basis. This allows you to cut checks to your employee and the IRS every three months rather than keep up with standard payments and reporting every other week. It’s only available for those making a modest wage, however, and becomes un-applicable at higher income levels.
Part 4: Conclusion
And there you have it. That’s everything you need to know to get your company off the ground! Obviously, this is not an exhaustive account of everything you’ll need to worry about, and I’m curious if there is any interest in me doing more content like this, but it at least touches on all of the different steps and considerations needed to properly incorporate. And, hopefully, does a decent job of demystifying it all a little bit.
I hope you have enjoyed this brief rundown of my experience and lessons I have learned, and if you’ve made it this far might I suggest paying my website a visit as well. (hyperobjective.com) This series is a bit different than my usual content, but I try to do prescriptive stuff like this from time to time and strive to reflect the same sensibilities and viewpoints in all of my work. Perhaps this article can light the way for an entrepreneur or two who are in just a little too deep, and, as is often the case, just need a push in the right direction.
I’m also quite curious to hear input from you guys as well, so please leave a comment on Medium or Instagram, (both are @hyper_objective), and please give me a follow in whatever platform you prefer. It really does help when I get input from you guys and I’m always glad to get suggestions on what I can do better.
hyperobjective.com 