So you’ve got a small business. Maybe it’s just you and an idea so far, or maybe you’ve got a handful of employees and are starting to win new business. No matter where you are in the startup timeline, it’s worth starting to consider incorporating your business.

There are two primary reasons to incorporate your business: limiting liability and separating the business taxes from your own. Limited liability is probably the primary reason to incorporate: all it takes is one customer with a grudge to lead to a lawsuit against your business.

Frivolous or not, it takes time and effort to fight any lawsuit – and if your business isn’t incorporated, all your personal assets are at risk, including your house and other property. Incorporating limits your liability in any lawsuit or other obligation to the amount you’ve invested in the business.

A beneficial tax situation is the other main reason to incorporate. Not only are US businesses taxed at a lower rate than individuals, you’ll be able to claim more expenses to reduce your taxable income.

Other reasons to incorporate include:

• If you plan on acquiring investors – either to raise capital or to attract employees by offering ownership shares in your company – incorporation is essential.
• The existence of a corporation doesn’t depend on any one person or group of investors. Incorporating makes it possible for owners or shareholders to leave the business or sell shares without imperiling the future of the company.

Getting organized

Finally, there’s an underappreciated benefit to incorporation – one that many entrepreneurs may see as an initial drawback. When you file for incorporation, you’ll have to do quite a bit of paperwork, which can be a drain on your time. However, some of the work you’ll have to do can really help you organize your business.

Many small businesses are run by energetic, passionate entrepreneurs who love their work – but may not have an MBA or extensive experience running a company. Going through the incorporation process forces you to think through details of how the business should operate, what the corporate structure is, and how the ownership breaks down. While it can be a pain, this effort can really pay off for business owners who tend to avoid that kind of work.

How to incorporate

There are a few ways you can get started with incorporating your business.

• Directly with a lawyer. The most traditional source for incorporation assistance, a lawyer can walk you through the entire process of setting up your corporation. This can be a relatively expensive approach, though, and is best if you’re in a high-risk industry or have intricate ownership or management issues.
• Do it yourself online. At the opposite end of the spectrum from hiring lawyers, you can choose to download incorporation forms on your own. The application process is fairly standardized, but make sure you’ve done your research beforehand so you know exactly what to expect. This is the least expensive method, but puts the burden on you to get every step of the process right.
• Professional services firms. The middle ground between hiring lawyers and doing it yourself is using a professional service firm. These companies often handle a variety of business services, such as accounting, taxes, and insurance, and can offer a wealth of experience at lower cost than some lawyers.

Once you’ve decided to incorporate, there are a lot of key decisions to make, from the official name of your business to the creation of a bank account. Here’s a good summary of what you’ll need to prepare. You’ll also need to decide exactly what type of corporation to form. Here’s a quick description of the most common options:

• General corporations. The most common option, these legal entities can be owned by an unlimited number of stockholders who are personally shielded from debts or obligations related to the business.
• Close corporations. Close corporations have 30 to 50 shareholders, no ready market for their stock, and active participation by the majority of shareholders in corporation management.
• S corporations. This type of corporation provides the benefits of incorporation, but it eliminates “double taxation,” which is when the profits of a corporation are taxed first as income to the corporation and then second as income to the shareholders when profits are distributed as dividends. An S corporation is limited to 75 or fewer shareholders.
• Limited liability company (LLC). An LLC is a business entity formed upon filing articles of organization with the proper state authorities. LLCs generally provide limited liability to their members, and are taxed like a partnership which prevents double taxation.

A lawyer, accountant, or other expert can give you more information about which option is right for your situation. There are also plenty of guides out there to choosing the right business structure.

If you want to start comparing incorporation service providers, we can help. Answer a few simple questions and we’ll match you to qualified providers in your area.