“That’s the secret to life…replace one worry with another…” – Charles M. Schulz (Charlie Brown)
If you’re starting a new business, you’ll be faced with four choices for incorporation. The value of incorporation is extremely high while the cost is relatively low. If you’re trying to get a merchant account to do your own payment processing, being incorporated is a must. The four main types of incorporations are as follows:
- Sole Proprietorship
- C Corp
- S Corp
- Limited Liability Company (LLC)
You will almost never want to start a sole proprietorship because it provides no liability protection. If your company gets sued or falls into debt you’re responsible. End of story. On the other hand, you are not a multi-billion dollar corporation so you do not need to deal with the expenses of a C Corp.
So we really only have two choices for most entrepreneurs, S Corps and LLCs. This is where things get interesting. Here’s a table I created showing their relative Pros and Cons and why I think most businesses should probably incorporate as LLCs.
| Limited Liability Company | S Corp | |
| Ease of Operation | Easy. No meetings. | Must have meetings. Corpoate Minutes etc. |
| Administrative Requirements | Few. | Elect board of directors, create annual report filings |
| Taxes | On the individual level | On the individual level |
| Self Employment Tax | Salary subject | Salary subject but not shareholder distributions |
| Raising Capital | Can sell interests subject to operating agreement | Shares of stock. Can’t be owned by corporations |
Those are the major differences. In my view, you don’t want to be wasting your time with having to elect a board of directors, dealing with minutes and all the other hassle that comes with S corps. Just start an LLC as it’s easier to run while providing the advantages of being a separate legal entity.
Where to Incorporate
90% of people should get incorporated in Delaware regardless of the physical location of their business. If it’s good enough got 55% of the Fortune 500 companies, it’s good enough for you. There are numerous reasons to get incorporated in Delaware. There’s a much faster turnaround time with paperwork than most states. The fees for incorporation are also cheaper. Finally, Delaware has a court system that is pro-business.
Keep in mind that even if you incorporate in Delaware, there’s still laws you may have to follow in your own state. For example, California has a code called “long arm statute” which basically tells says that you still have to abide by their laws regardless of where you incorporated
How To Get Incorporated
Using a third party incorporation company is by far the easiest and cheapest way to get incorporated. These companies are called “Registered Agents.” There are numerous companies you can find on the Delaware Division of Corporations website. Instead of inundating yourself with 100 choices and doing nothing, I’ll just share the company I use.
They’re called Incorporators USA, LLC (an LLC, imagine that) and for a few hundred bucks, they did all the heavy lifting for me. They took care of my EIN, IRS tax stuff, certificate of incorporation, and act as my registered agent.
If you’re still confused about the process, checkout the IRS website. Just don’t get lost down a dark hole and end up doing nothing. Get it done and move on.
