After Incorporating a Business: What You Need to Know
Start contemplating the right business structure for your business. You’ve probably heard corporations generally demand more administrative time and resources than other entities. For example, it takes more time and money to meet all your compliance requirements as a corporation than as an LLC. And sole proprietors fall into that easier to manage class of businesses too.
However, consider the major reduction in the corporate tax rate. As a result, the C Corporation becomes a more attractive option for more businesses. And even small businesses may find this the case. Do you plan to form a C Corporation? Then check out these things you’ll need to know.
After Incorporating a Business
1. Get a Tax ID and Open a Corporate Bank Account
One of the first things you’ll need to do is get a tax ID (or EIN, Employer ID Number) with the IRS. Think of it like a social security number for your corporation. Review the criteria and apply for an EIN on the IRS website. There’s no cost for getting an EIN.
Once you have your EIN, you can apply for a business bank account (note that you will need an EIN before you can get a bank account). As a corporation, you are legally required to keep your personal and corporation finances separate. The corporation will need its own bank account and keep its own financial records.
2. Choose How to Pay Yourself
So you’ve formed a corporation. Now you need to carefully consider how you get paid. Do you provide services for the C Corp? Then you could consider yourself an employee. As a result, you need to receive reasonable compensation for whatever work you provide. That compensation is subject to payroll taxes and you need to be paid this reasonable compensation before you can make any non-wage distributions/dividends.
Beyond compensation for services, you can pay yourself (and all other shareholders) a dividend as a shareholder. These dividends are not subject to payroll taxes. But keep in mind that the C Corporation is its own tax paying entity. Employee salary and payroll taxes are deductible by the corporation, while dividends are not deductible.
If you have elected to be taxed like an S Corporation, you will pass your percentage of the company’s profit or loss to your personal tax return. These distributions (the profits) aren’t subject to FICA/self-employment taxes. However, if you have an S Corporation and are actively working in the business, you’ll need to pay yourself a market-rate salary for the work you do.
Chat with a tax advisor if you have any questions – such as what is a reasonable compensation for your services and what’s the best strategy for splitting your income by salary and dividends, whether you are taxed like a C Corporation or S Corporation.
3. Using a Registered Agent
If you don’t have a physical location in a state where your business is registered, then you must select a registered agent to accept documents (what the state calls ‘service of process’ notices) on your behalf. These documents can include notices of lawsuits, tax notices, and other official federal/state correspondences.
A registered agent must have a physical address in the state, maintain office hours from 8 a.m. to 5 p.m. on Mondays through Fridays, and meet any other state requirements. You can designate yourself or an employee as the registered agent, but you may want to find an experienced third-party registered agent to ensure your agent is always available during business hours. You can expect to pay between $100 to $200 for registered agent services in a state.
4. Renew your Corporation
Know this once you incorporate with the state. Paperwork obligations continue long after your initial filing. Currently, all states, except Alabama and Ohio, require some kind of annual or bi-annual report filing. And a few require an initial report too. Don’t fail to file these. Or you’ll probably be hit with fines. As a result, your corporation could fall out of good standing with the state. And you might lose your liability protection.
The state uses the annual report to stay updated with a company’s activities. And it typically asks for the names and addresses of directors. You’ll also need to provide the registered agent’s address and number of shares of stock issued. The fee varies from state to state. For example, expect to pay anywhere from $50 to $400.
Check with your state’s Secretary of State office. Or consult an online filing service. Find out all the important details. How often do you need to file? When does your specific deadline fall. And how much will you need to pay.
5. Hold a Shareholder Meeting, and Other Compliance Needs
A C Corporation must hold at least one shareholders and directors meeting annually. And you must record meeting minutes to ensure transparency. This holds true even for closely held corporations. For example, corporations with just a few shareholders must still comply. Don’t file your minutes with the state or any external agency. Instead, they should be kept with your other corporate records. For example, keep them with your articles of incorporation, company bylaws and resolutions. Corporation must also record and maintain the voting records of the company’s common shareholders or directors.
6. Pay your Taxes
Federal income tax law recognizes C corporations as a separate taxpaying entity. As a result, the law requires they make their own tax filings. And taxes come out of their profits. When you incorporate, you will most likely be liable for:
- Income tax: Similar to the personal tax return you file each year, the corporation will need to file an annual tax statement to report the income, gains, losses, deductions, and credits. Use IRS Form 1120. This form is typically due on/around April 15 for calendar-year entities.
- Estimated tax: Taxes must be paid as you earn or receive income during the year. This is either in the form of a withholding (employees) or estimated tax payments (corporations, self-employed individuals, etc.). A corporation will typically need to make estimated payments if it expects to owe $500 or more in taxes with their annual return. You can use IRS Form 1120-W to figure out your estimated tax.
- Payroll taxes: You are required to withhold payroll taxes from an employee’s paycheck. This is also true for your own paycheck, if you receive compensation for the services you provide to the corporation. These deductions include: federal income tax withholding, social security tax, Medicare tax (and additional Medicare tax), state income tax withholding, and any other local tax withholdings.
7. Get Any Needed Local Permits and Licenses
Most likely, you will need some kind of permit or license for your corporation. I like to think of it this way: when you incorporate, it provides a solid legal foundation. But the local licenses and permits are like a driver’s license. They give a business permission to operate. Examples are professional licenses, reseller’s license, health department permit, and more. Contact your local government office, or visit BusinessLicenses.com, to figure out exactly what types of permits are needed for your business and location.
8. Get Business Liability Insurance Coverage
Incorporating represents an important step toward separating you from the business. and this minimizes your personal liability. However, don’t think this offers fail-safe protection. And don’t think of it as a substitute for insurance. A corporation won’t protect you unconditionally from personal liability. For example, if your personal actions result in an injury, you can be personally liable. As a result, you will probably want to protect your business from personal injury or property damages in the event of a lawsuit. Insurance comes in different forms depending on your business needs, so you should discuss your specific business risks with an insurance agent or broker who’s familiar with your kind of business.
Bottom line: understand your tax and other compliance requirements. Don’t fret the administrative obligations of a C Corporation. Just see your business complies.
This article, “After Incorporating a Business: What You Need to Know” was first published on Small Business Trends