List Yourself!

The main one is putting a wall between your personal finances and your business. Once the business is its own legal entity, a claim against it generally stops at the business instead of reaching your home or your savings. There are secondary benefits worth having: more choice in how profits are taxed, more credibility with customers and lenders, a degree of privacy because the business name and address represent you instead of your own, the ability to build credit in the business's name, and protection of that name within the state where you register.

Mostly administration. You run the business at a more formal level than a sole proprietorship, which means filings, records and deadlines you did not have before. The other drawback applies to C Corporations specifically: the company pays tax on its profits, and you pay again when those profits are distributed to you. That is what people mean by double taxation, and it is why a C Corporation is often not the right first structure for a small business. It is avoidable, as the next answer explains.

They are the same kind of company taxed two different ways. A C Corporation pays tax on its own profits. A corporation that elects S Corporation treatment does not file tax on those profits itself; they pass through to the owners and are reported on personal returns, so they are taxed once rather than twice. The election is made on IRS Form 2553, and the deadline is short: within 75 days of forming the company, or within 75 days of the start of the current tax year. Not every company qualifies. An S Corporation is limited to 100 shareholders, and those shareholders must be United States citizens or residents.

A Limited Liability Company sits between a sole proprietorship and a corporation. It gives the owners the liability protection of a corporation without most of the formality, so there are no board minutes to keep and fewer filings to make. That combination is why it is the common choice for small businesses. An LLC can also elect to be taxed as an S Corporation, so profits flow through to the owners and are taxed at personal income rates.

A corporation formed for one of five recognised purposes: charitable, religious, scientific, educational or literary. It cannot enrich its owners. Money beyond operating costs has to go back into the organisation's purpose, which is what allows it to operate tax free. Approval is needed at both the state and the federal level with the IRS. Like any other corporation, it shields the personal assets of the people behind it, provided the legal structure is kept in order.

You will hear a lot about Delaware, Wyoming and Nevada. Delaware offers flexible, business friendly statutes, while Wyoming and Nevada have low filing fees and no state corporate, franchise or personal income tax. For most small businesses that is a distraction. A reasonable rule of thumb is that with fewer than five shareholders you should register in the state where you live or where the business has a physical presence. Registering somewhere else makes you an out of state entity at home, and the extra fees and paperwork usually cost more than the saving is worth.

Generally as soon as you can. The liability protection applies from the date the company is formed and is not backdated, so every month you wait is a month you are personally exposed. One practical consequence of forming part way through a year is that you will file two returns for that year: one under your old structure up to the formation date, and one as the new entity from that date onward.

There are three usual routes. Doing it yourself costs the least, but you handle every detail and every state specific rule. A filing service costs a little more and prepares and files the documents for you, which avoids the small errors that get applications rejected. A lawyer costs the most and is worth it when the situation is genuinely complicated, such as an unusual share structure or large sums of money. Whichever route you take, it is worth a conversation with a tax professional about which structure suits your circumstances.

No. Registering in one state stops someone else registering a company under the same name in that state, and does nothing in the other 49. Nationwide name protection is a trademark, which is a separate process. Simply using a name in trade gives you some common law rights without registering anything, but a trademark registered with the USPTO is considerably stronger. Note also that owning a name is not the same as being findable under it, which is a different problem and the one this site exists to solve.

The work is not finished when the formation paperwork is accepted. Both LLCs and corporations file an annual report, and the requirements vary by state. Significant changes also have to be recorded by filing Articles of Amendment, for example if you authorise more shares or a board member leaves. Letting these lapse can cost you the good standing that your liability protection depends on.