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Friday, June 13, 2008

How do I incorporate (form a legal entity)?


By now, I hope that you have made the conscience decision to legally structure your company. Doing so will help to limit your liabilities by providing for protection of your personal assets. It will also help reduce your tax burden and provide for the writing off of expenses with pre-tax dollars.

The ability to file ones’ own paperwork is now tremendously easier thanks to The Internet. Traditionally, you would have had to hire an attorney, legal secretary, or other legal professional to assist you (and you still can if you feel uncertain).

If you want to tackle the job yourself, you can save a few hundred dollars by doing so. The best place to start is with the Secretary of State in your home state. You can also form your corporation in other states that make the process easier; for example, Delaware is known as a corporate haven. From their website: “More than 800,000 business entities have their legal home in Delaware including more than 50% of all U.S. publicly-traded companies and 60% of the Fortune 500.” See the Delaware Secretary’s corporation division at http://corp.delaware.gov/

When checking the Secretary’s website (in any state), bear in mind that the name you have picked out may already be taken, so it’s a good idea to establish your name before printing up letterhead, creating advertisements, etc. The process takes only a few minutes, and most states will immediately issue your state registration number.

The next step is to go to the IRS EIN website and apply for an EIN (Employer Identification Number), which is similar to a Social Security Number, but for the business. Once on this page, click the “APPLY ONLINE NOW” button. You will need this EIN to open a bank account in the name of the corporation.

Other considerations:
You will have to decide which type of corporate structure is best for your business and your tax situation. If you are unsure, check with an accountant or CPA. I have found that for small business, the S-corp or an LLC is best. If you are a sole proprietor, then a single member LLC is a good choice, and allows you to file an extra schedule on your regular 1040 tax form (versus filing both corporate and personal tax forms each year).

If you are still unclear whether or not you can do all of the paperwork yourself, try using http://www.legalzoom.com/ as they have a good reputation for assisting business owners through the corporate structuring process.
Good Luck!
JM Kelly, The IT Entrepreneur

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