Every year, there are new opportunities to grow your business. For many small business owners, now is the perfect time to consider forming a Limited Liability Company (LLC). The LLC has quickly become the most popular business structure for small business owners. According to the Delaware Division of Corporations, over 1.5 million LLCs are registered in Delaware alone as of 2024.

LLCs provide business owners with many significant benefits, from protecting their personal assets to potential tax savings. In this article, we give you 23 reasons why forming an LLC could be the smartest business move you make in 2023.

#1) Personal Asset Protection:

The primary reason why business owners form LLCs is to protect their personal assets. When you form an LLC, it establishes your business as a separate legal entity, which protects your personal assets – like your home, car, and personal bank accounts – from business-related debts and liabilities. Forming an LLC can keep the creditors of your business from reaching into your own pocket.

#2) Pass-Through Taxation:

The IRS treats LLCs as pass-through entities for federal tax purposes. Profits and losses pass through the business to the owners who report this information on their personal tax returns.

Pass-through taxation prevents the “double taxation” issue that some corporations experience, as it taxes profits only once, either at the corporate level or the shareholder level, but not both.

Pass-through taxation can help simplify business taxes for small business owners. According to the Tax Foundation, pass-through businesses, including LLCs, account for more than 60% of all business income in the U.S.

#3) Flexible Management:

LLCs allow for flexible management structures. As an LLC owner, you can choose to manage the company yourself, appoint a manager, or even have multiple managers. With an LLC, small business owners can tailor their company’s management structure to meet the needs of their business.

A study published by the Society for Human Resources Management suggests that businesses with flexible management structures are better equipped to respond to changing business environments and may experience higher levels of growth.

#4) Easy Formation Process:

Creating an LLC is a relatively simple and straightforward process. In most states, all you need to do is file an LLC formation document with the Secretary of State’s office and pay a filing fee. There is no requirement to complete complicated legal forms, making LLCs an attractive option for busy entrepreneurs and small business owners.

An online incorporation service, like IncNow, can complete the whole LLC formation process for you. They can also provide you with the necessary internal documents, like an LLC Operating Agreement, so that you can run your LLC properly. Delaware business lawyers prepare IncNow’s LLC Operating Agreements, and they come ready to sign.

#5) Credibility:

Forming an LLC can potentially give your business more credibility. Having “LLC” in your company’s name shows customers, vendors, and partners that you are serious about your business and have taken the necessary steps to protect it legally.

#6) Flexible Profit Distribution:

LLCs offer flexibility when it comes to distributing profits. In an LLC, Members can choose to distribute company profits in any way they prefer, while corporations typically require profit distribution based on the number of shares each shareholder owns. Flexible profit distribution can help small business owners implement more effective financial planning and facilitate growth.

#7) Scalability and Growth Potential:

An LLC is an ideal choice for businesses expecting growth and expansion.. It is easy to make changes in an LLC, like adding new members or adjusting ownership percentages. This flexibility can make it easier to adapt to changes in the business environment and accommodate future growth. According to the Tax Foundation, LLCs outpace corporations when it comes to net income.

#8) No Ownership Restrictions:

In comparison, U.S. corporations face some restrictions over who can have ownership in the company. For example, S-corporations have strict limits on the number of shareholders the company can have. In addition, non-US residents are not allowed to be shareholders in an S-corp.

#9) Increased Privacy:

Some state laws provide LLC owners with more privacy than others. For example, Delaware does not require any information about the Members or Managers of an LLC to be made public. Business owners find this level of privacy increasingly attractive as instances of fraud become more prevalent.

#10) Customizable Operating Agreements:

The LLC Operating Agreement outlines the roles, responsibilities, and decision-making processes within a Limited Liability Company. LLC Members can customize the Operating Agreement to best suit the needs of their business. A well-prepared LLC Operating Agreement provides Members with clarity on how the business is to be run and can help prevent business disputes.

#11) Establish a Business Credit Profile:

An LLC can obtain a DUNs number and establish its own business credit profile. A strong business credit profile can make it easier for a business to obtain loans and credit lines without relying solely on the owner’s personal credit. The Federal Reserve reports that small businesses with a strong credit profile are more likely to access financing and receive favorable loan terms.

#12) Continuity of Business:

An LLC has perpetual existence, meaning the business entity continues to exist even if the owner dies or leaves the business. Perpetual existence provides stability and continuity for an LLC, aiding its ongoing success. An article published by the George Washington Law Review found that businesses with a perpetual existence were more likely to experience long-term success by surviving economic downturns and better navigating ownership changes.

#13) Access to State Incentives and Grants:

Many states offer incentives and grants to businesses that operate as LLCs. These incentives can include tax breaks, access to financing programs, and other resources designed to support small businesses. By forming an LLC, you may be eligible for specific benefits meant to help your business grow.

#14) Easier Transfer of Ownership:

Transferring ownership in an LLC can be simpler than in other business structures. Members can join or leave an LLC by simply updating the company’s Operating Agreement. However, all LLC Members typically have to approve any transfer or sale of Membership interest.

Many LLC Operating Agreements include provisions, like Pick Your Partner or Right of First Refusal, that are meant to prevent unwanted individuals from buying their way into an LLC. The LLC Operating Agreement may give the company the right to buy back any membership interest before it can be offered to someone else. In addition, the remaining Members may be able to vote to reject an ownership sale.

#15) Less Ongoing Paperwork:

LLCs typically have less ongoing paperwork and administrative requirements than corporations. For example, Delaware does not require LLCs to hold an Annual Meeting or complete an Annual Report. This can save small business owners precious time and resources, allowing them to focus more on growing their business.

#16) Enhanced Collaboration Opportunities:

An LLC’s flexible ownership and management structure can make it easier to collaborate with other businesses, professionals, or entrepreneurs. This can lead to new partnerships, joint ventures, or other growth opportunities for your business.

#17) Easier Succession Planning:

LLCs make transferring ownership simple, which is an advantage when it comes to succession planning. The LLC Operating Agreement can outline the process for transferring ownership interests, making it easier to pass a business on to the owner’s heirs in the future. According to Harvard Business Review, businesses with clear succession plans are more likely to successfully navigate generational transitions and maintain long-term success.

#18) Simplified Annual Requirements:

In many states, LLCs have simpler annual reporting requirements compared to corporations. For example, in Delaware, LLCs only need to pay an annual fee in order to remain compliant. In contrast, Delaware corporations must hold an Annual Meeting of shareholders, file an Annual Report, and pay an annual Franchise Tax.

Maintaining an LLC is easy and can save you time and resources, allowing you to focus on running and growing your business instead of dealing with extensive paperwork.

#19) Better Business Record-Keeping:

Operating as an LLC can encourage better record-keeping practices, as there are certain legal requirements regarding the documentation and maintenance of business records. This can help you stay organized and make informed decisions about your business. Better record-keeping practices enable small business owners to accurately assess their financial health and make better-informed decisions for the business.

#20) Legal Compliance:

Forming an LLC ensures that your business is operating in compliance with state laws and regulations. This can help you avoid potential legal issues and protect your business in the long run.

#21) Flexible Tax Treatment:

The IRS enables business owners to select the taxation method for their LLC based on the most beneficial structure for their business. The IRS “Check-The-Box” provisions let LLCs to choose whether they prefer S-corporation or C-corporation treatment for federal tax purposes.

LLCs are taxed as pass-through entities by default. However, LLC Members can choose to make a different tax election that is more advantageous to the company’s current situation. For example, an LLC can select S-corp or C-corp treatment for federal tax purposes by completing a straightforward tax election form.

IncNow LLC Tax Tips

This flexibility allows LLC owners to select the tax treatment that best suits their business needs and financial goals. Businesses with flexible tax treatment options are able to better optimize their tax strategies and reduce their overall tax burden.

#22) Branding Opportunities:

Incorporating “LLC” into your business name can provide additional branding opportunities, leading to increased customer trust and loyalty. A strong brand identity is important for any business that is looking to attract and retain new customers to achieve higher growth and revenue.

#23) Limited Liability for Members:

As the name suggests, an LLC provides its Members and Managers with limited liability protection. This means Member’s personal assets are generally protected from business debts and liabilities. Limited liability provides business owners with the protection and peace of mind that they need to commit to growing their business.

From personal asset protection and tax advantages to management flexibility and scalability, there are many reasons to consider forming an LLC for your business. By understanding the advantages of an LLC structure, you can make an informed decision about what’s best for your business and set yourself up for success in 2023 and beyond.

What is the Best State to Form an LLC?

Legal professionals and savvy entrepreneurs consider Delaware to be the best state to form an LLC. Delaware’s well developed business laws and dedicated business court are known for providing LLCs and their owners with the strongest legal protections anywhere in the world.

Top 5 Benefits of Forming a Delaware LLC

There are numerous benefits to forming an LLC in Delaware. Here are five of the most important benefits for small business owners.

Benefit #1: Versatility

Delaware LLCs are versatile and work well for many types of business. From solo consulting ventures to multi-million-dollar properties, small time entrepreneurs and large conglomerates alike use Delaware LLCs for a variety of business purposes. Delaware LLCs are ideal for safeguarding tangible assets like real estate, as well as intangible assets like intellectual property or trademarks.

Benefit #2: Accessibility

Almost anyone (excluding individuals from certain restricted countries) can establish a Delaware LLC without living in or visiting the state. There is no residency requirement to open a Delaware LLC. All you need is to appoint a Delaware registered agent to represent your company. Delaware LLCs are widely recognized and can do business in any state or country.

Benefit #3: Low Startup Cost

Delaware has some of the lowest filing fees for LLCs. IncNow’s Delaware LLC packages start at just $9 plus state fees.

Benefit #4: Business Friendly Legal Environment

Delaware has a separate court, the Court of Chancery, dedicated to resolving business disputes. Judges in the Court of Chancery are experts in business law and are known for settling disputes efficiently and fairly.

Benefit #5: Privacy for Owners

Delaware does not require LLC owners’ names or addresses to be displayed on the state’s public database. The formation document for a Delaware LLC only needs to include the name and address of the company’s Delaware registered agent.

When to Form a Corporation

Incorporating a corporation, as opposed to forming an LLC, depends on several factors related to your business plans. While Delaware law makes it relatively easy to convert from an LLC to a corporation if you need that form in the future, here are three key considerations where you may want to start with a corporation from the outset:

1. Raising capital from outside sources can be accomplished with an LLC, but it is a but more investor friendly to use a corporation because the default laws for corporations have more built-in protections for investors. For example shareholders can more easily transfer their shares to other investors, in the absence of a shareholder agreement. Also corporations have certain fiduciary duties that are un-waivable, like the duty of loyalty, to better protect investors from self-dealing managers.

2. Every corporation has a board of directors that run the company. This is not typically found in an LLC, which usually just has members and managers.

3.Corporations are often used by high growth startups that anticipate multiple rounds of investment from an angel inventor round to the A-round and B-round. Many different types of venture capitalists and institutional investors are more comfortable investing in the corporate form.

You should consider forming a corporation when your business is: experiencing significant growth, planning to raise capital through stock issuance (where you should consult with a lawyer with securities law experience to avoid early regulatory problems), and comfortable naming individuals to the board of directors and is not merely wholly owned by a larger holding company.

If you do not plan to raise capital right away, many businesses start with a small number of authorized shares of just one common class. This is “going private before you go public.” You can always amend the number of shares later when needed for a round in investments. Starting with a small number of authorized shares, like 1500 shares, can also avoid a large franchise tax bill early on, when you are not yet in full swing.

The post 23 Reasons to Form an LLC in 2025 appeared first on IncNow.

One of the best decisions that a new business owner can make is to incorporate their business. But with so many business entity types and legal jargon, incorporating your business can be overwhelming and confusing. If you are a first-time business owner, you may be asking questions like:

• What does LLC stand for?
• What does Inc., or Co. mean?
• What is an LLC and how does it work?
• What is a partnership, and how are they different?

In this article, we breakdown all of the corporate endings out there. Consider this your complete guide on legal business entity types and terms.

What Does “Incorporation” Mean, Exactly?

“Incorporation” is the process that many business owners go through to legally separate themselves from their business and protect their personal assets. Incorporating a business means filing documents in a state to turn the business into a legal entity. Most businesses incorporate as either a corporation or a limited liability company (LLC).

” Incorporating a business means filing documents in a state to turn the business into a legal entity.”

By incorporating a company, a business takes on a legal life of its own. An incorporated business has its own assets, financial obligations, and legal liabilities.

The owners of an incorporated business receive limited liability protection for their personal assets. Things like cars, homes or personal bank accounts are protected from claims made by the business’s creditors, or any lawsuits against the business.

MORE: Why Incorporate in Delaware?

What Is Limited Liability?

In business, limited liability means that the owners of a company are not personally responsible for the debts and other liabilities of the business.

If a business owner has limited liability, then a creditor of the business cannot go after the business owner personally to settle claims against the business. With limited liability protection, a business owner can only lose the amount of money that they chose to invest in the business. If the company faces a lawsuit, the business owner is also protected legally.

Limited liability protection benefits business owners operating businesses of all sizes. Whether you run a small storefront or a large real estate company, you need limited liability protection to protect yourself from personal risk.

“Limited liability means that the owners of a company are not personally responsible for the debts and other liabilities of the business.”

Corporations and LLCs are two types of legal business entities that provide limited liability protection for their owners. Limited liability allows business owners to take risks in hopes of growing their business without risking their personal financial health or well being.

What Is a Limited Liability Company ( LLC)

A “Limited Liability Company” (LLC) is a type of business entity that safeguards its owners (known as “Members”) with liability protection. The state laws where the LLC is registered enforce these protections.

Members of an LLC benefit from liability protection that keeps their personal assets, like homes, secure even if the business faces debt or other financial obligations. Simply put, their risk is limited to the amount they’ve invested in the business.

LLCs are an excellent choice for small business owners looking to grow while preserving personal financial security. However, LLCs are used by a wide range of businesses, from one person consulting firms, to large investment funds.

MORE: What Is an LLC and How Can It Protect My Business

What Is a Corporation?

A corporation is a type of legal business entity that exists completely separate from its owners, managers and employees.

The owners of a corporation are called “stockholders”. Stockholders typically invest money to help start the business and hold an economic interest in the company.

Most corporations are structured as “general corporations”. A general corporation has a three-tier structure that works like this:

Tier 1.) Stockholders:

A corporation’s stockholders have ownership in the company and often invest money to get the business started. A corporation’s stockholders choose people to be part of the company’s board of directors.

Tier 2.) Directors:

The directors are the captains of a corporation and are in charge of keeping the company on course. Directors are elected by the corporation’s stockholders and are tasked with making major strategic decisions for the business.

A corporation’s board of directors will meet multiple times within a year to vote on specific business decisions and elect the company’s Officers. State incorporation laws require a company’s board of directors to hold one Annual Meeting each year.

“A general corporation has three-tiers: Stockholders, Directors and Officers.”

Tier 3.) Officers:

Officers in a corporation are in charge of running the company’s day-to-day business operations. Officers have titles like “President”, “Treasurer”, or “Secretary”. The corporation’s board of directors are in charge of hiring and firing the officers.

What Is Inc.?

If the name of a business ends with “Inc.”, you know that the company is set up as a corporation. State laws require corporations to include a corporate ending in their business name. The most popular corporate endings include:

• Inc. (short for “incorporated”)
• Co. (short for “company”)
• Corp. (short for “corporation”)
• Ltd. (short for “limited”)

Corporate endings are important because they signal to other businesses and the general public that the owners of a particular business have limited liability.

Is “Inc.” Different From “Corp.”?

“Inc.” and “Corp.” are both corporate endings and mean the same thing. A corporation can choose to include either “Inc.” or “Corp.” at the end of its name to comply with state laws. It is a matter of preference.

What Is a Close Corporation?

A “close corporation” is similar to a general corporation, but is not required to have a board of directors. Close corporations are legal business entities that provide limited liability protection for their owners. State laws may limit the number of stockholders that a close corporation can have.

Family businesses have historically been the primary users of close corporations, which are not as popular as general corporations.

What is an S-Corp?

An S-Corporation (S-Corp) is a federal tax election. It is a pass-through that automatically flows through all profits and losses to its owners every calendar year. Each general corporation starts by default as being taxed as a C-Corporation (C-Corp). Within 75 days of incorporation or within 75 days of subsequent calendar years, a corporation may make the S-election on IRS Form 2553. In fact, even an LLC can make an S-Corp tax election. Instead of the C-Corp with a second layer of corporation income tax, the profits and losses are passed through directly to the shareholders’ personal tax returns on Schedule K-1.

Aside from avoiding double taxation of a C-Corp, the S-Corp tax election also allows income to be split 50/50 between salary (subject to self-employment FICA taxes) and S-Dividend (not subject to self-employment FICA taxes). Therefore, an S-election can lower the effective tax rate. Compared to either a C-Corp of an LLC taxed as a sole proprietorship or partnership. An LLC can also file IRS Form 2553 election to be taxed like an S-Corp on Form 1120-S Tax Return.

What is a C-Corp?

A C-Corp is a reference to how a general corporation is taxed by default. C-Corp is not a reference to a state law entity. Some corporations may prefer to have their corporation taxed as a C-Corp due to some advantages of C-Corps and limitations on S-Corps. Some C-Corp advantages include the ability to accumulate net operating losses within the corporation to offset profits in future years. This may be an advantage when a business has more losses than its owners can use personally to offset other profits. The C-Corp can elect a fiscal year different from the calendar year.

Many corporations also are not eligible for the S-Corp election, which requires all owners to be U.S. citizens, with a cap on the maximum number of shareholders. Plus the S-Corp requires only one class of owners. LLCs can also file IRS Form 8832 electing to be taxed like a C-Corp on Form 1120 Tax Return.

What Is a Delaware Public Benefit Corporation?

Some states, like Delaware, allow businesses to form a Public Benefit Corporation (PBC). A Delaware Public Benefit Corporation is like a general corporation that has a bigger purpose than just maximizing profits. By incorporating as a Delaware Public Benefit Corporation, a business can hold itself accountable for practicing social-responsibility and helping its surrounding communities.

The board of directors in a Delaware Public Benefit Corporation is responsible for advancing the company’s stated public benefit interest when making business decisions. In Delaware, a Public Benefit Corporation must state its public benefit purpose in the company’s publicly filed incorporation document.

“A Delaware Public Benefit Corporation is like a general corporation that has a bigger purpose than just maximizing profits.”

The board of directors of a Delaware Public Benefit Corporation is required to provide the company’s stockholders with a statement of the company’s progress towards its stated public benefit goals. The Delaware law requires the board of directors to make the public benefit statement at least every two years.

What Is a Non-Profit Corporation?

People often use “Non-profit corporation” to refer to an organization with 501(c)(3) tax exempt status from the IRS. These organizations typically include public charities or private foundations.

501(c)(3) tax exempt organizations can accept donations that are tax deductible to their donors. Non-profit organizations with 501(c)(3) status are often incorporated as “non-stock corporations”. Like the name suggests, a non-stock corporation is a type of corporation that does not have any stockholders.

The owners in a non-stock corporation cannot benefit economically from the company’s activities. This aspect of non-stock corporations is what allows these types of companies to qualify for 501(c)(3) tax exempt status.

Types of Partnerships: GPs, LPS, LLPs and LLLPs

Some businesses operate as partnerships. Here is a breakdown of the different types of partnerships.

What Is a General Partnership (GP)?

A general partnership (GP) describes two or more individuals that agree to share responsibilities and profits in a business. Starting a general partnership does not require submitting any paperwork. Once a pair of partners start running a business together, they are in a general partnership.

A general partnership does not provide limited liability protection for anyone involved in the business. Each partner is jointly and separately responsible for all of the partners’ actions.

What Is a Limited Partnership (LP)? 

A limited partnership (LP) is made up of two parts:

• The active managers, called “general partners”; and,
• Passive investors, called “limited partners”.

The general partner in a limited partnership does not have any personal liability protection and is completely responsible for running. The limited partners have limited liability and can only lose the money that they invest in the business.

Private equity or venture capital firms often use limited partnerships. In these business structures, the limited partners are individuals or institutional investors that provide the firm with capital. The private equity or venture capital firm serves as the general partner and actively manages the investments into companies.

Limited partnerships can help people make investments without taking on too much personal risk. At the same time, it allows other people (the general partner) to run the business without having to put in all of the capital.

What Is a Limited Liability Partnership (LLP)?

Professionals like lawyers, doctors, and accountants typically use limited liability partnerships (LLP). In an LLP, the law protects business partners from the actions of one another. However, an LLP does not protect you from your own negligence.

What Is a Limited Liability Limited Partnership (LLLP)?

A limited liability limited partnership (LLLP) provides limited liability to all the partners. LLLPs are similar to LLCs, but more complicated to set-up and operate. Limited liability limited partnerships are not popular and not many states recognize them.

LLC Types and Management Structures

Some states allow businesses to form different types of LLCs that provide unique benefits. There are also multiple ways that an LLC can be structured.

What Is a Series LLC?

Some states, including Delaware, allow business owners to form a Series LLC. A Delaware Series LLC allows business owners to operate multiple business lines and protect assets across businesses all under one umbrella.

A Delaware Series LLC is able to create an unlimited number of separate business units, called “protected series”. Each protected series provides limited liability protection for its owners, and protected series have protection from one another.

Delaware Series LLCs allow entrepreneurs to benefit from the protections of forming multiple LLCs with less hassle and less filing fees.

MORE: Grow Your Business With a Series LLC

 What Is a Single-Member LLC?

A “Single-Member LLC” is an LLC with just one owner. The structure of a Single-Member LLC is generally the same as an LLC with multiple members, or a “Multi-Member LLC”. In a Single-Member LLC, the sole member is often also the manager of the company.

A Multi-Member LLC may choose only one of the members to be the manager, or hire a third-party manager who does not have any ownership in the company.

What Is a Member-Managed LLC?

In a Member-Managed LLC, the LLC members wear two hats. Not only do they own part of the LLC, but they also handle the day-to-day operations of the business.

What Is a Manager-Managed LLC?

In a Manager-Managed LLC, the LLC members hire a manager to handle the everyday tasks of the business. The manager is typically a skilled professional. The LLC Operating Agreement should make it clear what the manager is allowed to do and what rights the LLC members still have in the company.

MORE: How to Structure an LLC: Member-Managed vs. Manager-Managed

What Is a Statutory Trust?

You might have heard about “Statutory Trusts,” which used to be called “Business Trusts.” Statutory Trusts work a lot like regular trusts with people who give benefits (beneficiaries) and people who manage the trust (trustees). These trusts are flexible and follow a Trust Agreement. But, they might not be the best choice for most businesses because they need a Trustee who is based in Delaware.

What Is a Holding Company?

A Holding Company is a ‘parent company’ that owns one or more daughter companies which are wholly-owned subsidiaries. The parent company is not often involved in daily operations of the subsidiaries. A big benefit of using a holding company is adding a second layer of asset protection, one step removed from business operations. Parent companies held by multiple people can also simplify tax filings, because the single member LLC subsidiaries are disregarded entities for tax purposes, where profits and losses all flow-up to the Holding Company partnership consolidated tax return.

What Is a Registered Agent?

A Registered Agent’s primary purpose is to receive service of process lawsuits on behalf of your company. The Registered Agent then must forward that notice to their communication contact person on a timely basis. The Registered Agent is a physical (not virtual) office open during business hours where a sheriff or private process server can deliver legal notices located in the state of incorporation. For a company that also files Certificates of Authority to do business in other states, that company must also have a Registered Agent in each additional state where it is qualified to do business. Having a Registered Agent is a legal requirement of each state. If you live in the business’ home state, you can act as your own Registered Agent, otherwise business owners appoint a Registered Agent such as IncNow.

Registered Agents often offer additional corporate services that help you maintain your business and its good standing with the state.

The post What Does LLC, Inc., Co., Corp., and Ltd. Mean? Complete Incorporation Guide appeared first on IncNow.

The process of incorporating can come with a lot of new questions, especially if you’ve never done this before. One of them is corporation vs. incorporation, and how they differ, as well as the difference between Inc. and Corp. We’re always happy to share our knowledge to help people when it comes to incorporating. Here are a few of the most common questions:

Q: What is the difference between a corporation and incorporation?

A: A “corporation” is the business entity itself. “Incorporation” is the act of starting a corporate business entity.

A corporation (Inc.), a limited partnership (LP), and a non-profit (non-stock) corporation are incorporated entities. This means they have filed their corporate charter, the founding document, with the state of incorporation. They have tiers of ownership and management that are defined by statute. Corporations file annual reports with the state of incorporation.

Limited liability companies (LLCs) and Series LLCs are examples of unincorporated entities.  The contract between owners and managers, called the Operating Agreement, governs these types of entities. LLCs offer a higher degree of freedom in regard to management and how the owners choose to have the company taxed.

Q: What does it mean when a company is incorporated?

A: Incorporation means the company has become a legal entity.

Businesses incorporate to separate the assets and liabilities of their business from that of their owners. When a business is incorporated, that means it has filed the necessary paperwork with the state division of corporations to become a corporation.

Q: OK, what’s the difference between inc vs. corp?

A: It’s the same thing.

Inc. and corp. are different suffixes you can choose when naming your corporation. Inc. is the most common, but ultimately it is up to you.

Q: How do I form an LLC?

A: Contact a registered agent.

Forming an LLC is a fairly simple process. Once you have chosen a name for your company that ends in LLC, L.L.C. or Limited Liability Company, contact a registered agent like IncNow. You only have to fill out a simple online form to start the process. The registered agent will file the necessary paperwork to form your LLC and forward correspondence from the state for an ongoing fee. The registered agent will forward you the company’s Certificate of Formation once the state approves and files it.

Q: Do I need to incorporate twice?

A: No. You only incorporate once. You just go on-record elsewhere you do business.

Many people incorporate in one state and have their principle place of business in another state.  All 49 other states must accept for example a Delaware LLC and let it do business. However, they may also require it to go on-record in their state.  Many shop around for the best state in which to incorporate and come to Delaware. The advantage of this is that the state of incorporation’s laws will govern the internal affairs of the company (over less business-friendly laws in the state where you happen to be living/working).

After incorporating in Delaware, you should determine whether you also need to file for a Certificate of Authority in the state of your principle place of business.  This is known as “qualification” to register this “foreign” company. “Foreign” is a term meaning “out-of-state” not “international”. This is done in the state of the principle place of business and any other states where the company has an office.  Every state has different laws regarding the level of activity needed before it requires qualification.

Q: Can a company incorporate in multiple states?

A: No, you should only incorporate in one state.

Some business owners confuse foreign qualification with forming an entity in each state they do business. While business often do form multiple entities if they have subsidiaries, it is not advisable to form separate entities for one business. It creates issues with choice of law, which entity holds the companies assets, and uncertainty if there are discrepancies between each entities governing documents. It also would create unnecessary filing and maintenance costs for the business.

Take advantage of the freedom of being able to choose the laws of the state that govern your internal business structure. Forming a redundant entity in your home state or in each state you do business is not a well-advised strategy.

Q: How many people do you need to incorporate?

A: At least one.

The simple answer is at least one. The individual who owns a company is referred to as the Legal Party. In a corporation this individual is called a shareholder or stockholder. In an LLC this individual is considered a member. The legal party who starts a company can act as the sole director, officer, and shareholder of a corporation, or, the sole member of an LLC. When there is only one member in an LLC this creates a single-member LLC, known as a Disregarded Entity for tax purposes or a “DRE”. For purposes of starting your company, you only need yourself.

Q: How much does it cost to incorporate?

A: The fee will vary based on what state you choose to incorporate in.

Every state has their own fee schedule when it comes to doing business in their particular jurisdiction. The fee will also vary based on whether you are starting an LLC or a Corporation and how quickly you would like to establish your new company. In Delaware, for example, the Certificate you file to create a corporation has a nominal fee of $109 and the LLC has a nominal fee of $110.

Q: Why do they say “foreign” when I am still in the United States? What’s my principal place of business?

A: It’s just a word. As for the Principal Place of Business (“PPB” for short), there is a test for that.

The state where you incorporate is called the “domestic” state and the other 49 states are called “foreign” states.  You should not make the mistake of “re-incorporating” in the other states by filing another certificate of formation or articles of organization. That would result in having multiple companies by the same name and be a big mistake.  Instead you go “on-record” as for example a Delaware LLC doing business in Louisiana.  Where is your principal place of business?  In this example, Louisiana would be known as the “foreign” state where you have offices that do everything, so it is easy.

Other times, businesses have multiple locations. In those instances, one must look at where the executives make decisions (the “nerve center”) and where the activities are conducted (the “muscle center”) to determine where is your principal place of business.  The overall balancing of this two-prong approach is the “total activities test”.  Every company has one principal place of business. Generally, you need to go on record there. This is so if there is a problem, the injured or aggrieved parties know where to serve you with official papers. This is a matter of public policy and you should comply with this state law requirement and evaluate where you should go on record with a certificate of authority.

We cannot tell you whether your home state requires you to go on record. That is a legal opinion. IncNow is a filing service, not a law firm. You may want to contact legal counsel in your home state or make the decision for yourself after reviewing the laws in your home state. To avoid this trouble, you can play it safe and just go on record. If you are wondering what the penalty is for not going on record, that too is a matter of state law. We have heard some states, like New York, only charge a $50 fine plus require you pay the costs to qualify. Other states may have different rules which are not as forgiving.

Q: What is the legal theory behind this requirement?

A: It’s all about official, physical presence.

What is the purpose of this? Is this just another way for your home state to make money?  It’s more a matter of official records where the public can find your business.  In law school, there is a class known as Civil Procedure. In that class, one learns that a company is subject to “general jurisdiction” in both the state of incorporation and in the principal place of business.  Therefore the courts of those two states have jurisdiction over your business over anything under the sun, no matter where the controversy arose, if the plaintiff chooses to file in those states.

In other states usually you are only subject to “specific jurisdiction” over the activities which were conducted in those states. This prevents “forum shopping” to the most plaintiff friendly states.  In order to let people know how to get in touch with you in the states where you have general jurisdiction, you must have a physical presence on public record in both states. This could be your headquarters office, or it could be a registered agent’s office (like Agents and Corporations, Inc.) This filing allows people to look-up your company name with the secretary of state and locate an address where to serve your company legal papers within the boundaries of the state.

Q: Let’s cut to the chase, do I need to qualify? Please help.

A:  We look forward to assisting you.

How do you know if you need to register in the state of your principle place of business?  Most  states define the terms “doing business” as having a “brick and mortar” location there,  employees, holding and or shipping products or inventory,  holding specific licensing to that state or holding real property.  In some states, banks may also request the qualification in order to open the bank account for the company in the state of the principle place of business.  Sometimes micro-businesses that are one person activities are no required to file the certificate of authority.  Also sometimes you need to qualify in other states in which you are conducting business.

Each state has its own laws on whether your company’s level of activity is great enough to have to go on record.  Generally you do not need to qualify if the only contacts with other states is selling products, advertising, hiring sub-contractors as sales-people or selling services, provided you do not have an office or employees in that state.

Q: What are the mechanics?

A: We can help and make it easy.

The process of qualification in most states will require a short application, a fee, plus either a Good Standing Certificate or Certified Copy of the formation certificate.  The forms vary from state to state as far as the required information.  Agents and Corporations, Inc. offers the service of qualification for all 50 states. Your registration is handled by professionals who have the experience to gain approval in a timely fashion without guess work.  At your request, we will quote you our processing fee, the state fee and cost of the required documents.  You need to name an agent with a street address in the state of qualification. The certificate of authority is the document obtained once the process is completed and approved.

For many; incorporation is the first step and qualification is the next step toward finalizing their business filing.  Agents and Corporations, Inc., is happy to provide professional services to accommodate these and other business necessities.

Q: When should you use ‘incorporated’ and ‘corporation’?

To start a Corporation, the Certificate of Incorporation must include a permissible Corporate indicator in the name of the Corporation. Incorporated, often shortened to ‘Inc.’, is the most commonly used ending. Not every state has the same list of permitted Corporate endings, but the ones all states have include ‘Corporation’, ‘Corp.’, ‘Company’, and ‘Co.’.

Q: Can anyone incorporate in Delaware?

A: Yes.

Yes, almost anyone can incorporate in Delaware and IncNow assists customers from all 50 states and over 100 countries. The federal government does place restrictions on doing any business with individuals and countries listed with the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”). People who are “Specially Designated Nationals” or associated with certain sanctioned countries are not allowed to do business in the U.S. This SDN list is a database of individuals and entities that are banned from certain business activities within the United States.

MORE: What You Need to Know About Delaware Foreign Qualification

 You can take the LLC out of Delaware, but you cannot take the Delaware out of the LLC.

*(unless there is a merger or a conversion, but we’ll save that for another post.)

Why Incorporate in Delaware? Find out more here.

The post “What’s the Difference Between Corporation and Incorporation?” and Other Common Incorporating Questions appeared first on IncNow.

“The only ship that doesn’t float is a partnership”. This is common when consulting entrepreneurs who are considering bringing on a business partner. While a general partnership is the oldest business organization, it is the worst choice possible. This is because general partnerships are laden with traps that could easily end in financial ruin for all involved. A Limited Partnership is a better form of organization for protecting investors.

So, why was the limited partnership law developed to protect investors, and how do you avoid being considered a general partnership?

What Is a General Partnership?

A general partnership is formed through implied conduct. This is when two or more individuals agree, either orally or in writing, to engage in business towards a common goal. A general partnership commences upon performance of even preliminary tasks to create the business. This is the default applied anytime two or more people choose not to file a limited liability business entity before they operate together. Liability during this pre-incorporation stage is referred to as “promoter liability”.

A general partnership is a bottomless pit of liability. Partners are married at the hip in every action. Partners are liable for their own actions plus their partners’ actions. This is true even if every partner did not approve or was not aware. Each partner has the authority to make legally binding decisions on behalf of the general partnership. Partners share all profits and losses equally by default unless otherwise agreed upon.

Liabilities against partners in a general partnership remain “joint and several”, regardless of agreement. This means a 1% partner can be personally subject to liens and asset attachments for 100% of the general partnership liability. Only after the creditor is paid, would it be up to that 1% partner to collect proportionate shares of liability from his or her other partners to recoup his losses of 99%.

What Is a Limited Partnership?

A limited partnership does what its name suggests. It limits the responsibilities of one or more of the silent investment partners, called limited partners. A limited partner is not involved in the day-to-day activities. Their liability is also limited to their investment in the company. This differs from the rule of the general partner in the limited partnership, who is the manager and retains unlimited personal liability beyond their own investments within the company.

Many of today’s limited partnerships use a separate corporation or LLC as the general partner to address a general partner’s unlimited liability. This two-layer entity structure limits the liability for the general partner. Limited partnerships are often used in real estate investments and private equity. The term “master limited partnership” is used when the limited partnership is sufficiently large in size and solicits institutional investors.

Why Form a Limited Partnership?

Entrepreneurs should never use a general partnership. Even for “small investment” businesses where risks are remote or investments are small, the potential downside of unlimited personal liability may result in personal bankruptcy. Therefore, a better structure would be to form a limited partnership with an LLC setup to serve as its general partner, simply by forming a Delaware LLC instead. An LLC affords liability protection for everyone included by default, including a natural person as manager, without having to form a separate entity for the manager as would be needed in a limited partnership.

General Partnership vs. Limited Partnership

The biggest difference between a general partnership and a limited partnership is liability. Here are the pros and cons of both types of partnerships:

General Partnership Pros and Cons

Pros of a General Partnership:

• The general partnership is easy to start because no filing is needed. It can be started with a partnership agreement oral, written, or implied.

Cons of a General Partnership:

• Unlimited personal  liability: Each partner is jointly and severally liable for the business’s debts and obligations. This means that business creditors can come after each partners’ personal assets, such as house, car, and savings, even for the other partner’s actions whether known or unknown to the partner.
• Potential for disputes: Conflicts between partners regarding business decisions, profit sharing, or responsibilities can arise. Partners may sue each other for their bad business judgment and poor decisions.
• Shared profits: Profits by default are shared equally even if one partner contributes more effort or capital.

Limited Partnership Pros and Cons

Pros of a Limited Partnership:

• Limited liability: Limited partners’ liability is limited to the amount of their investment in the business.
• Popular form of business for private equity investors. These investment ready structures are often referred to as Master limited partnerships.

Cons of a Limited Partnership:

• Limited control: Limited partners are passive investors not involved in the day to day operations. 
• Control vested In General Partner: Aside from the Limited Partner investors, a Limited Partnership must name one or more General Partners. The General Partner has control over the day-to-day operations of the business of the Limited Partnership. However, the General Partner also has unlimited personal liability for all debts of the Limited Partnership. For that reason it is advisable for a corporation or LLC to be the General Partner, to limit the liability of the General Partner. A second alternative is to have the General Partner make an election to have limited liability, which turns the Limited Partnership into a Limited Liability Limited Partnership (LLLP) also known as “Triple – L P”.

How to Form a Limited Partnership

IncNow has a package to file a limited partnership. This package is designed for lawyers and sophisticated business owners who already have their own form of Limited Partnership Agreement.

The limited partnership is not recommended for new entrepreneurs who are better served starting an LLC.

Start your Limited Partnership today!

The post General Partnership vs. Limited Partnership: What’s the Difference? appeared first on IncNow.

What do companies like Uber, AirBnB and DoorDash all have in common? Each secured millions of dollars from venture capital firms and investors as startups. They are also all  incorporated as Delaware C-Corporations. 

Delaware C-Corps are the most popular entity choice for startup companies looking to attract investors. Angel investors and venture capital firms prefer to do business with Delaware C-Corps because of significant legal and tax benefits.

Why are Delaware C-Corps a good option for startups? We dive deep into what Delaware C-Corps are, how to create one, and how incorporating as a C-Corp can benefit your business. 

What Is A Delaware C-Corporation, Exactly?

The “C” in C-Corp refers to a corporation’s federal tax designation. The IRS designates Delaware Corporations as C-Corps by default. However, a corporation can elect to be taxed as an S-Corporation by filing IRS Form 2553. 

Many entrepreneurs get confused when trying to incorporate a C-Corp on their own. The Delaware Secretary of State provides forms to set up a “Corporation”, but not a “C-Corporation”. This is because a C-Corporation is not a distinct type of business entity. It is simply a type of tax designation.

Why Are Most Startups Delaware C-Corps?

The Delaware C-Corp is the best option for startup up companies because of specific legal and tax benefits. These benefits make it relatively easy to grow the company by trading corporate stock while protecting founders and investors. 

Companies are not required to have any ties to Delaware in order to incorporate in Delaware. This means that companies located all over the world are able to take advantage of the stability and protections provided by Delaware’s General Corporation law. 

Startup companies are typically high growth ventures. These types of businesses focus heavily on research and development to create new products and services with the goal of meeting emerging markets. In some cases, startups develop products for markets that do not even exist yet. These businesses require large amounts of investment capital to support rapid growth in addition to the reinvestment of business profits.

Delaware C-Corporation Benefits.

Benefits of incorporating as a Delaware C-Corp include:

• Limited Liability Protection for Investors and Founders

With hundreds of thousands of dollars being committed to startup companies, it is important that investors and company founders protect their personal assets from any business liabilities. By structuring a company as a Delaware C-Corporation, the parties involved can limit their liability to only their investment in the business. In other words, investors and founders can only lose as much as they put in. 

• Business Friendly Legal Environment

Business and legal professionals refer to Delaware as the world’s premier forum for corporate law. Delaware’s advanced corporate laws, upheld by its dedicated business court, provide predictability in judicial outcomes. Corporate circles refer to this as the “Delaware Advantage”.

Delaware’s General Corporation Law allows capital allocators to feel comfortable investing large amounts in Delaware corporations. Likewise, company founders and board members enjoy the freedom to make important decisions to grow the business while protecting themselves from personal liability. Delaware courts are known for applying the “Business Judgment Rule”. Delaware does not find corporate managers personally liable for the losses of shareholders if an honest business decision results in a poor outcome. These protections are conditional on there being no evidence of self dealing by those involved. 

Delaware’s acclaimed business court, called the “Court of Chancery”, has developed over 200 years worth of legal precedent. The Court’s judges, called “Chancellors”, are appointed by the state governor rather than elected, and have a record of consistently respecting the rights of business owners and investors. The high volume of corporate disputes met by the Court of Chancery, built on its depth of case law makes judicial outcomes for Delaware corporations predictable and equitable. 

• Tax Advantages

Incorporating as a C-Corporation provides startups with some distinct tax advantages compared to incorporating as a S-Corporation. The most significant advantage for startup companies is the ability to roll forward financial losses. A Delaware C-Corp can account for some of its current losses in future periods to offset future gains. 

A startup typically generates large financial losses in its early years as it burns cash from investors trying to develop products. Successful startups will eventually reach a tipping point where the business model becomes profitable.

At this stage, a C-Corp can account for some of its previous losses and avoid paying income taxes on its newfound profits. This allows the company to reinvest profits back into the business while only paying the relatively low corporate tax rate. 

Why Do Investors Prefer Delaware C-Corporations?

In addition to strong liability protection, venture capitalists and other institutional investors prefer Delaware C-Corps because they provide more flexibility in corporate governance. 

• Easier to Trade Shares

Compared to other entity types, a Delaware C-Corp can more easily transfer shares of its corporate stock. A C-Corp is also able to continuously issue more shares of its stock to sell to new investors. 

When venture capital firms invest in startups, their goal is typically to help the company grow to a point where its corporate stock can be traded publicly. Early investors in private companies can realize a significant return on their investment when a company completes an Initial Public Offering, or “IPO”, and they can sell their shares on the open market.

• Stock Based Compensation Incentives

Delaware C-Corporations can also issue stock options to their employees. Startups use stock options as an incentive to attract talented individuals to the company. Early employees in a startup can make large amounts of money by helping the company grow and selling their stock options when the company goes public.

Another advantage is that a C-Corp can issue corporate stock to other business entities. This can be a useful tool for startups to complete certain business deals using equity in the company instead of cash or debt. 

• Multiple Classes of Stock 

A Delaware C-Corporation can issue multiple classes of stock. Venture capitalists prefer a company to have multiple classes of stock because it gives them more freedom to negotiate certain deals.  

Startups backed by venture capital firms typically issue two types of stock: preferred stock and common stock. Preferred stock often comes with more privileges, like a higher dividend or an increased number of votes per share. Common stock is the type of stock typically issued to the public. Common shareholders either have reduced voting privileges, or in some cases, no voting privileges at all. 

C-Corps can also issue convertible preferred stock. Convertible stock allows investors to swap their preferred shares for common shares, making it easier to trade their shares when the company goes public. 

How To Form A Delaware C-Corporation.

Incorporating as a C-Corp in Delaware requires the following steps:

Step 1.) Choose a Name for Your Delaware Corporation

There are several things that company founders need to consider when choosing a name for their Delaware Corporation. 

The first point to consider are naming requirements. A corporation’s name must comply with naming guidelines put in place by the Delaware Secretary of State. A corporation’s name must include an approved corporate ending. Some of these endings include:

• Corporation;
• Corp;
• Incorporated;
• Company;
• Association;
• Fund, or;
• Foundation.

Certain words cannot be included in a corporation’s name. For example, the name cannot contain the words “bank” or “trust”, unless the company is authorized as a bank. 

Step 2.) Choose a Delaware Registered Agent

The majority of companies incorporated in Delaware are not actually located in Delaware. The law requires corporations located outside of the state to appoint a Delaware registered agent.

The role of a registered agent is to receive important legal notices, like lawsuits or subpoenas, served to the company. The registered agent must maintain a physical address (not a P.O. box) in the state of Delaware and be available during normal business hours. 

Most Delaware corporations hire a Delaware registered agent service rather than opening an entire office in Delaware. Not only can a Delaware registered agent service help your company meet its legal requirements, they can also help manage and track important documents.   

Step 3.) File a Certificate of Incorporation

The next step is to file a Certificate of Incorporation with the Delaware Secretary of State. The Certificate of Incorporation is the public document that officially creates the new corporation. 

A Delaware Certificate of Incorporation needs to include the following information:

• The name of the company;
• the name and address of the registered agent, and;
• The total amount of authorized stock and the par value per share.

Step 4.) Prepare Internal Documents

A startup’s founders will need to prepare specific internal documents in order to set up a corporation properly. These documents include:

• The Executed Minutes of Incorporation to elect one or more directors;
• The corporate bylaws to govern the company’s internal affairs;
• The Unanimous Action of Directors to elect officers and issue stock to initial shareholders, and;
• Stock certificates issued to shareholders. 

Step 5.) Draft a Stockholder Agreement

A Stockholder Agreement is a type of internal corporate document that establishes the powers and rights of stockholders. A Stockholder Agreement can place certain restrictions on when, how, and to whom a company’ stock can be transferred to. 

Any corporation with more than one shareholder should have a Stockholder Agreement. Stockholder Agreements can help prevent future disputes related to valuations, buybacks and stock transfers to unwanted third parties.  

Is A Delaware C-Corp Best For Every Business?

The Delaware C-Corp is not always the best choice for every type of business. A small “mom and pop” shop may not be able to take full advantage of the Delaware C-Corp. In addition, some of the extra legal requirements for C-Corps, like holding an annual meeting of shareholders, may actually be a burden on the business

The Delaware LLC tends to be the best option for most businesses that are not looking to take on outside investors. The Delaware LLC is currently the most popular business entity in the United States. This is mainly because Delaware LLCs are more flexible and easier to manage than corporations. 

A Delaware LLC can always convert to a Delaware C-Corporation later on. Depending on the growth projection of the business, founders may be better off starting a company as a Delaware LLC and converting to a C-Corp once they are ready to raise funding. 

The post Why Startups Should Choose the Delaware C-Corp. appeared first on IncNow.

A Corporate Secretary can be a valuable asset to a corporation as it grows. But what does a Corporate Secretary do, exactly? Are companies required to have one? We dive into the details of what a Corporate Secretary is and why they are important.

What Is a Corporate Secretary?

A Corporate Secretary is one of three essential senior positions typically found within a business organization. Along with the President and Treasurer, the Corporate Secretary rounds out the core officer positions that a company establishes when initially incorporating.

The Corporate Secretary works closely with c-suite executives and the Board of Directors to guide the company’s governance practices. A Corporate Secretary is knowledgeable of current governance trends and can advise board members on how to navigate potential issues.

 What Does the Corporate Secretary Do?

A corporation’s by-laws set forth the powers and duties of the Corporate Secretary. Corporate Secretaries have core responsibilities pertaining to the management of official corporate records and compliance. They may also serve as a resource to board members, providing advice on their specific responsibilities.

The primary responsibilities of the Corporate Secretary typically include:

1.) Arranging Board Meetings

The Corporate Secretary organizes and attends all Board of Director or committee meetings. The Corporate Secretary is often tasked with:

• Sending notice of stockholder and board meetings;
• Creating meeting agendas;
• Collecting and recording motions, votes and proxies; and,
• Signing meeting resolutions and certifications.

2.) Maintaining Corporate Records

Corporate Secretaries are responsible for maintaining all of a corporation’s important internal documents. Some of these documents include:

• Stock certificates and transfers;
• Business licenses;
• Corporate Minutes and resolutions;
• Shareholder correspondence; and,
• The corporation’s capitalization table.

3.) Advising Board Members

Board members in a corporation often come and go. An experienced Corporate Secretary may be responsible for onboarding new members and advising them on their fiduciary duties.

Many corporations also operate subsidiary companies. The Corporate Secretary may be responsible for ensuring that subsidiaries maintain good standing status and that their boards follow proper governance practices.

The company President may also assign the Corporate Secretary to perform additional duties. These include:

• Assisting in shareholder outreach;
• Making inquiries on behalf of the company;
• Preparing materials and presentations; and,
• Organizing or complying with company contracts.

 Corporate Secretaries and The Annual Meeting

State corporation laws require corporations to hold an annual meeting of shareholders. The Corporate Secretary plays an important role in organizing this event.

In addition to managing the logistics of the annual meeting, Corporate Secretaries are also responsible for preparing and distributing the necessary legal governing documents.

Is a Corporate Secretary a Board Member?

The Corporate Secretary is often not a board member. They do not even need to be a shareholder in the corporation.

A company’s Board of Directors elects a Corporate Secretary, often to a one year term. The Board typically renews the Corporate Secretary’s terms at the annual meeting.

Is the Corporate Secretary a Lawyer?

A company’s Corporate Secretary does not need to be a lawyer.

If a Corporate Secretary is a lawyer however, they may also serve as general counsel for the company. This often comes with increased responsibilities in areas such as securities compliance, mergers and acquisitions, and employee relations.

Do Companies Need a Corporate Secretary?

Many state corporation laws require companies to name a Corporate Secretary. These law also require corporations to hold an annual shareholder meeting, which the Corporate Secretary plays an important role in.

The post What Is a Corporate Secretary and Does My Company Need One? appeared first on IncNow.

If you have your own business, you may benefit by forming an LLC. An LLC keeps an owner’s personal assets separate from any business assets. LLCs can protect owners from liability in the event of a legal dispute with a creditor, or even a business partner. This is true even if your business does not have any employees. Forming a single member LLC  (an LLC that consists of just one person) offers the same perks as forming an LLC with multiple members.

But how do you become an LLC, and how can it benefit your business?  Here’s what you need to know.

Why Form a Single Member LLC?

Technically, anyone can become a single member LLC. Freelancers, contractors, photographers, and musicians may choose to become a single member LLC to legally separate their professional operations from their personal assets, like their home, car, or savings. In the event of an issue with your business, your personal assets are considered separate and legally inaccessible to creditors.

Becoming an LLC can also lend prestige to your business, even if that business is you. It enables you to make tax elections and lower your effective tax rate. You can expand your LLC to include more members if your business grows in the future.

When Should I Form An LLC?

Forming as an LLC can be beneficial to businesses holding any low or moderate risk assets. These types of assets are often things like equipment, real estate property, or just substantial cash accounts.

Forming as an LLC can also enable some critical business functions. Opening a business bank account is a good example. An LLC is able to obtain an Employer Identification Number (EIN) from the IRS. Banks may require your business obtain an EIN in order to open a business bank account. An EIN number can also help your business track payroll. IncNow can help an LLC obtain an Employer Identification Number from the IRS.

How Do You Become an LLC, Exactly?

IncNow and some other registered agents make the process of becoming an LLC easy for you. In general, you’ll want to follow these steps:

1. Decide on a name for your company:

It can simply be your name, or it can be a more typical company name that reflects the work that you do. Note that the company name should end in “LLC”.

2. Check the availability of your company name:

IncNow can check the name with the state of formation for you, as well as a second choice, if you are considering alternative names.

3. Select a registered agent.

Many people choose to incorporate their companies—including single member LLCs—in Delaware due to its business-friendly laws. While you don’t need to live in Delaware to have a Delaware LLC, you do need to have a registered agent in the state of Delaware. This is a person or company who forwards important legal correspondence from the state to you. IncNow can help serve as your registered agent for a small fee.

4. Fill out an online form.

Just provide basic information, like your company name and your contact information. The whole process takes five minutes or less. You’ll be issued a filed copy of your Delaware Certificate of Formation after the state of Delaware approves it.

5. Create your single member LLC operating agreement.

This is an important step that’s often overlooked. Single-member LLCs should have an operating agreement. This written document establishes that you are separate from your business entity, and that you are the owner and manager of your LLC.

How Is An LLC Formed?

An LLC is formed through filing a formation document with the Secretary of State. In Delaware, this document is called a “Certificate of Formation”. Other states may utilize different names however. “Articles of Organization” and “Certificate of Organization” are other common terms used to reference an LLC’s formation document.

A Certificate of Formation is typically a one page document which simply contains the name of the LLC. The Certificate of Formation also names the registered agent for the LLC. Despite being just one page, this document contains powerful language that gives an LLC the ability to shield its owners from the debts and liabilities of the business.

Becoming an LLC is an easy and inexpensive way to protect yourself from personal liability for business obligations. It’s definitely worth considering if you have your own business—even if that business is you. Plus you can tell your friends, relatives, and more importantly, your customers and vendors, that you are a business owner.

The post How to Become an LLC: 5 Easy Steps appeared first on IncNow.

In doing research, you may have come across the term “umbrella LLC” and wondered what, exactly, it means and how it can apply to your businesses. Here’s what you need to know, as well as how to decide if an umbrella LLC is right for you.

What Is an Umbrella LLC, Exactly?

An umbrella LLC is another word for a holding company. An umbrella LLC owns other LLCs that are below it, known as subsidiaries. It effectively shelters those LLCs from cross liability in the event that future litigation results in a judgment creditor trying to collect against assets of a company.

The traditional way to limit the future creditor to just the assets of the LLC against which she obtains a judgment is to set up multiple single-member LLCs owned by the same umbrella LLC. These different operating units help to insulate the assets of other affiliated operating companies. Bank of America and JP Morgan Chase are examples of companies which are umbrella LLCs with plenty of subsidiaries.

Umbrella LLC Benefits

An Umbrella LLC really provides benefits just like an umbrella protects the individual underneath it. Some of the protections are:

• Creating a shelter for the assets of each individual LLC as a subsidiary;
• Allowing for multiple business lines to lead up to one overarching parent company;
• Provides for a business structure that protects the Ultimate Beneficial Owner from compounding liability.

Umbrella LLC Cons

Umbrella LLCs are not without their drawbacks, mainly along the financial impact of keeping up with multiple subsidiaries. Such as:

• Higher overhead costs in general with multiple LLC filings;
• Taxes can become overly complicated;
• It can be very confusing which may result in comingling of assets in the long-run if the books are not properly kept.

Why Form an Umbrella LLC?

Subsidiaries of an umbrella LLC enjoy being affiliated with a larger company without being commingled with its assets. For example, a subsidiary may be able to borrow money at a lower rate thanks to the larger holding company. An umbrella LLC can also help companies save money by avoiding a multiplicity of tax filings.

And, from a legal standpoint, an umbrella company can shelter smaller subsidiaries from litigation issues.

Can an Umbrella LLC be formed as a Series LLC?

A Series LLC is one way to structure an umbrella company without needing to file separate subsidiary entities. A Series LLC has a Certificate of Formation that allows its members to establish protected business units. Assets can be allocated by members to be associated only with particular “protected series” of the company. This can be particularly attractive when separating well-insured or low risk passive investments. The members can divide the LLC into an unlimited number of protected business units. Each of those units has its own associated members interests, assets, and operations. A Series LLC is often compared to a honeycomb, where there is a group of individual, protected series as part of a larger LLC.

One protected series may be sheltered from the debts and liabilities of the other protected series therein under a Series LLC. By filing a Series LLC in Delaware, there is only one entity and it requires just one franchise tax payment each year, regardless of how many protected series have been established. This can be a potentially cost-saving option for people whose risk tolerance and assets profile do not justify the cost of forming separate subsidiary LLCs.

The traditional umbrella LLC, on the other hand, has one main LLC that owns and operates nothing. It only owns interests in other child LLCs, where all assets are held and operations are conducted.

Thinking of forming an umbrella LLC or Delaware Series LLC? We can help. If you have any questions about the process, or want to talk to an expert so you can decide which entity type is right for you. Please reach out to us at 1-800-759-2248 or email agents@incnow.com.

The post What is an Umbrella LLC? appeared first on IncNow.

Things to Consider When Choosing a State to Incorporate

What is the best state to incorporate? Many people choose Delaware to incorporate (or form) their LLC or corporation. Here are a few things to consider when making your decision:

• Business-friendly law: Choosing to incorporate in Delaware means that Delaware law will govern the internal affairs of the company, including owner versus manager disputes. Furthermore, by incorporating in Delaware, you have access to the Delaware Court of Chancery, a specialized internationally-respected business court that makes expedient and well-reasoned decisions.
• Experience: Some of the best business attorneys in the country become judges on Delaware’s Court of Chancery. Incorporating in any other state may result in capricious juries or inexperienced generalist judges deciding your case without the depth, protection or sophistication of Delaware corporate law.
• Popularity: More than 60% of Fortune 500 companies are incorporated in Delaware. The state is the domicile for many major corporations and LLCs, including Facebook, Yelp, Twitter, and Google.

What Is the Best State to Incorporate?

Delaware is the most popular state to form an LLC for people who shop around different states looking for the best state. Generally, if you want the strongest protection, you should form your LLC in Delaware.

The Delaware LLC is easy to maintain and allows for members to choose how the LLC is taxed. Delaware’s reputation of protecting business owners from creditors is widely known by businesses of all sizes. Delaware also protects managers from member lawsuits because Delaware protects virtually all business decisions, provided the decision is not self-dealing.

What Is the Cheapest State to Incorporate?

Delaware remains one of the more affordable states in which to form an LLC (14th lowest filing fee of 50 states). Delaware also ranks well for incorporation fees (17th lowest filing fee of 50 states). However, it is a mistake to choose your state of formation based solely on formation fees and annual fees. Shopping solely based on incorporation fees may save a few dollars on incorporation, but you will get an inferior bullet proof jacket that won’t protect your assets when you need it. A penny wise and a pound foolish.

Many businesses incorporate where the business is physically located, without consideration for that state’s reputation for business law. It is reasonable to consider initial and recurring costs, but the primary purpose of forming an LLC is to shield owners against being liable personally for the debts and liabilities of the business. This is why Delaware remains the best choice in which to form an LLC or incorporate your business.

Where Are Most Companies Incorporated?

Delaware is the most common state to incorporate in. The State of Delaware is a leading home for both domestic and international corporations. More than 1,000,000 businesses have made Delaware their home. Majority of the companies listed on the Fortune 500 call Delaware home, including Facebook, Yelp, and Wal-Mart.

What Is the Best State to Incorporate an LLC?

A Delaware LLC is generally superior to forming an LLC in any other state. The internal affairs of your LLC will be governed under Delaware business laws. These laws create a “veil” which is more difficult to penetrate and well-respected than in any other state. This means that your personal assets are more protected from creditors. Entrepreneurs also like Delaware’s Court of Chancery where judges are business experts without juries. This typically results in more just, predictable, and quick decisions.

Best State for Corporations and LLCs

Owners Delaware LLCs and corporations are given the strongest legal protection available by any state. Piercing the corporate veil, or making individuals personally liable for claims against their business, is very unlikely in Delaware. Delaware explicitly makes the charging order the sole and exclusive remedy of creditors of LLC members, meaning that creditors of members can only receive distributions from the LLC, and not take over that member’s interest or control foreclosure or liquidation.

Benefits of Incorporating in Delaware

Incorporating a business in Delaware provides economically valuable benefits to the parties involved. These protections are superior to those of any other state. Delaware corporations range from single-person consulting companies up to multi-national conglomerates. It is no surprise that more than 65 percent of Fortune 500 companies and over half of the publicly-traded companies in the United States incorporate in Delaware.

Delaware is not just a desirable home for corporations, but also the superior home for LLCs.

Protections Under Delaware Law

The primary reason to incorporate in Delaware is the many protections Delaware’s laws and courts offer. Delaware’s strong and well-proven asset protection shield protects the personal assets of company owners. This shield protects both Delaware corporations and Delaware LLCs. Additionally, if incorporated in Delaware, a business manager is protected from business owner lawsuits. This is true even if a particular business decision results in a loss to the company. This is known as the “Business Judgment Rule”.  It encourages risk-taking on the part of managers who may operate freely, without concerns of personal recourse liability. This gives business managers the freedom to pursue opportunities for higher rates of return and increased growth without judges or juries second guessing their decisions with the advantage of hindsight.

Delaware courts have a balanced approach to promoting shareholder value while protecting managers. Accordingly, the United States Chamber of Commerce has ranked Delaware’s business liability protection #1 in nearly every ranking since periodic rankings began in 2002.

Ease of Incorporation

Choosing to have your business governed under Delaware law is easy. No matter where it does business, Delaware law with govern a Delaware corporation’s internal affairs.  Simply file the initial incorporation or formation certificate for the business with the Delaware Secretary of State. Although a business may not have an office in Delaware, it is easy to incorporate here as long as the business has a Registered Agent in Delaware. There is no need to have a bank account in Delaware, or even have a business address within the state. The duty of a Delaware Registered Agent is to forward annual notices and court notices to the business wherever it may operate.

Protection for Businesses

The predictability of business law and courts in Delaware enables corporations and LLCs to structure their businesses confidently. This consistent high degree of certainty and integrity delivers added value to business owners. Delaware offers great protection, even when only one individual serves as the Director, President, Secretary, Treasurer and sole shareholder.

Delaware’s Outstanding Customer Service

Lastly, the Delaware Division of Corporations’ office provides outstanding customer service. This includes options for expedited document approval and filing in as little as 30 minutes. The Secretary of State of Delaware runs two shifts to maintain extended hours to keep the filing office open well-past regular business hours. Unlike the stereotypical image of government service as slow, unpleasant, and ineffective, the Delaware Division of Corporations consistently delivers efficient, consistent service with you and your business as their priority.

Best for You, Best for Your Business

When you choose your business’s legal home, you would be wise to file in Delaware. Delaware offers the unique protection of both superior laws and courts. This helps to ensure your assets remain protected and your decisions respected. Delaware provides ease both at start-up and in operation as only Delaware offers such an incomparable level of service and support. Therefore, when incorporating you should choose Delaware as the legal home of your corporation.

How to Incorporate a Business

Business owners can incorporate a Delaware corporation without ever visiting the state and without any experience with the incorporation process. Since Delaware does not keep record of the shareholders of the business, you only need to provide your incorporator a minimal set of information, including (1) the name of the corporation; (2) a contact person and their contact information; (3) names of initial directors and officers; and (4) the number of shares of authorized stock.

The incorporation process with IncNow is particularly simple and involves completing an online order form on that takes five minutes. IncNow submits your filing to Delaware the same business day. Within a few days (or as soon as an hour if you upgrade to the highest filing priority), IncNow will send you signature-ready documents for your new Delaware corporation.

MORE: What You Need to Know About Delaware LLCs

MORE: The Types of Corporations to Know

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When starting a business, you probably have a lot of questions, including “Is an LLC a corporation?” and “Where should I incorporate?”. You do not have to incorporate in your home state if the laws there are unfavorable to protecting you. Instead, you can shop around and opt into another state’s laws without having to relocate. Over a million companies have decided to form in Delaware where most choose the Limited Liability Company. Delaware laws will govern the internal affairs of your business (the liability shield and disputes between owners and managers) when your business is incorporated in Delaware.

Delaware is the gold standard for Corporation and LLC law. Both the Delaware Corporation and LLC are great because both offer protection to their owners from claims of company creditors. Nevertheless, there is a difference between an LLC and corporation and many entrepreneurs and property investors prefer the Delaware LLC structure. By analyzing the Delaware law advantages of the LLC over the Corporation, you can determine if the LLC is better suited for your purposes. This is typically the case because of the Delaware LLC’s operational simplicity and flexibility.

Is an LLC a Corporation?

An LLC is a different legal entity from a corporation. Delaware LLCs and Corporations share certain features, but they differ in key aspects. The Delaware LLC is the most popular choice because of its simplicity and superior liability shield. A contract called an LLC Operating Agreement governs an LLC. It is like a step-by-step instruction manual for the owners. A corporation has far more rules and requirements. A corporation is owned by shareholders, managed by directors, and operated day-to-day by officers. The corporation is incorporated, meaning many rights are restricted and set forth in the statute rather than in a private flexible contract.

Why Form a Corporation in Delaware?

The process of starting a Delaware Corporation begins with an incorporator signing and filing a Certificate of Incorporation with the Delaware Secretary of State. The incorporator then signs Minutes to adopt Bylaws and elect the initial Directors. Next, the initial Directors issue stock to the Shareholders and appoint the Officers of the Corporation. Going forward, the Shareholders elect the Directors each year and the Directors appoint the Officers each year. Directors control most major directional decisions, while the Officers carry out the plan established by the Directors.

Both the Officers and Directors have a fiduciary duty to act in the best interest of the Shareholders. Nevertheless, they are protected by the “Business Judgement Rule.” Provided they are not self-dealing, this rule protects the Officers and Directors. It gives them the freedom to take risks without the fear of being sued personally by the Shareholders for decisions that result in a loss. Shareholders do not make management decisions. In a Corporation, a single-person can wear all the hats and serve as the sole Shareholder, Director, and Officer (President, Secretary, and Treasurer).

Corporations are not very flexible. Statute and the Corporation’s own Bylaws limit what Shareholders, Directors, and Officers can do. Corporations, by default, do not have restrictions to prevent the other Shareholders from transferring their ownership to an adversary or others whom are not liked. To prevent unwanted stock sales, Corporations must have a separate Stock Purchase Agreement, outside of the Bylaws.

While entities may hold title to stock as a Shareholder, entities may not be corporate Directors orfLLL Officers. Only natural persons may be Officers or Directors.

Why Form an LLC in Delaware?

A Delaware LLC is more modern and flexible than a Corporation. The LLC is a hybrid, drawing upon some of the best characteristics of both a Delaware Corporation and a Partnership. What makes the Delaware LLC unique and powerful is two-way liability protection. This is available in few other states’ LLC laws or in any state’s Corporation laws.  While the first shield protects owners from creditors of the business, the second shield protects the business from the “outside in” to prevent a creditor of any Member from foreclosing on business assets or taking over the debtor Member’s interest in the company.

Instead, the Member’s creditor can only obtain a “charging order” as a lien on distributions to the debtor Member without giving the creditor an ownership right in the LLC. The importance of this feature cannot be overemphasized. Only giving a creditor a right to dividends is very undesirable to the creditor. The creditor would much rather liquidate a company and get their money back. The charging order remedy stretches out payments to the creditor on a schedule. The only time payments are made is when the Manager decides to distribute profits. This can save the company and the jobs of its Members who work for the company. It can even let the debtor Member continue to work and be paid as an employee while this charging order is in place. Once the charging order is paid-in-full, the creditor goes away!

To form a Delaware LLC, the Members engage a service company to act as the authorized person to sign the Certificate of Formation for filing with the Delaware Secretary of State. Every Delaware LLC must have its Members agree upon an Operating Agreement. The Operating Agreement can be written, oral or implied. This Operating Agreement is very important because it specifies the ownership and management rights within the LLC. One example of a common provision in Operating Agreements, not found in any Corporation’s Bylaws, are transfer restrictions. Operating Agreements may have a right of first refusal on the sale of any company’s Membership interest to outsiders. If the Operating Agreement needs to be changed in the future it can be amended and restated by its Members.

The Delaware LLC can be run by its Members directly or by a third-party Manager whom the Members designate. These Members and Managers can be entities and do not need to be individuals. Some may not be aware that in Delaware LLCs, the Members are allowed to waive fiduciary duties of the Managers. This is not available in a Corporation. Waiving the fiduciary duties encourages management to run the company without the fear of reprisal. Often companies seeking outside investment, for example, private equity deals, prefer to give management as much freedom as possible. This is to prevent investor lawsuits that challenge management decisions in court.

Unlike a Corporation where the right to access books and records is unwaivable, a Member’s rights to access information can be reduced in a Delaware LLC Operating Agreement. Only the basic contractual duty of good faith and fair dealing cannot be waived. Therefore, an LLC Operating Agreement can be customized to fit almost any deal or business arrangement you desire. It is important to draft the Operating Agreement clearly because, once it is agreed upon, courts will enforce it strictly. The Delaware Court of Chancery treats business owners as adults who should be able to understand the deal they agreed upon in advance, even if it may be unfair in retrospect. The court presumes Members to be sophisticated parties and expects them to sleep in the bed they make for themselves at the outset.

In short, due to the operational simplicity and contractual flexibility coupled with the two-way liability protection, the Delaware LLC is often preferred over the Delaware Corporation.

Do Delaware LLCs Have Directors?

LLCs do not typically have Directors. The three-tiered Director/Officer/Shareholder structure is a requirement of Delaware corporations. Some LLCs have borrowed this structure. However, is it more common to have an LLC managed by its members (owners) or non-member managers.

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