How to Incorporate Your New Business

Many of us dream of starting our own business. This entrepreneurial spirit is what drives America, but before you take the leap, make sure you know how to properly incorporate. 

First, decide what type of business you want.

If you are the only owner of the business, you are a “sole proprietor”. There is no government filing or approval required to operate your business in this way, and millions of Americans have done so. Just report the profits and losses from the business in your tax return on IRS Form 1040 on a separate sheet called Schedule C. And pay your federal and state income taxes if the business earns a profit.

If you have a business partner, the business is a “partnership”. That means that you and your partner share responsibility for running the business and share the profits and losses. Exactly how you want to do this should be spelled out in a partnership agreement. See “Do I Need a Written Contract with my Business Partner”?

Many business owners decide to incorporate their businesses. This is not a legal requirement. But it may be a good idea to form a corporation because it helps protect you personally from debts and liabilities connected with the business. It is perfectly acceptable to incorporate even if there is only one owner (shareholder).

If you decide to incorporate, follow these simple steps.
To incorporate you must fill out and file Articles of Incorporation with the Illinois Secretary of State. The form and easy to follow instructions can be downloaded from http://www.ilsos.gov/corparticles/. The filing fee is $181.25. Each year after the first, the corporation will have to file an Annual Report and pay a filing fee of $25 or more, depending on how much money it is making.

Sub-chapter S of the Internal Revenue Code allows corporations to receive favorable tax treatment. The requirements of Sub-chapter S are complicated, and there are disadvantages. Therefore, it is best to ask a professional if it is a good idea for the company to become an “S” corporation.

A limited liability company (LLC) is another possibility. It is more expensive to set up and maintain than a corporation, but it has many advantages and could result in lower federal and state income taxes. To form an LLC, you must fill out and file Articles of Organization with the Secretary of State. The first year filing fee is $500 and the Annual Report fee is $250. See http://ilsos.gov for forms and instructions. These are not easy to understand, but there are lawyers, CPA’s, commercial filing services and small business centers that can help you.