How To Incorporate a Business

The first and most important step to starting a business is filing papers with your State, the IRS, and opening a bank account to ensure your financial security (we don’t like to think about a threat like bankruptcy or being sued when just starting out, but separate accounts are a necessary precaution).

As someone who has been through this process many times, I can say this is the easiest part of starting a business.  Yet in talking to mentees and co-mentors, I realized that if you don’t know how to take these steps, it may seem daunting to get involved in legal forms.  So I made this guide.

Step One:  File Articles of Incorporation

This is the part in which it would be good to talk to a lawyer and / or CPA.  I have completed this stage with and without the advice of a lawyer, but it’s helpful to know some things before you start.

The most important decision here is whether or not you want to incorporate as an LLC, S-Corp, C-Corp, or B-Corp.  This step also has the option of filing as a nonprofit corporation should you so choose.  I personally filed for an S-Corp because I knew the structure of my business would take advantage of its taxation structure.  If you’re planning to include altruism in your company, a B-Corp may be appropriate.  I can’t advise you on this since it’s a legal matter, but you can probably find a free resource in your city that will help (in Michigan, the SBDC and Michigan Women’s Foundation are good options).

A lawyer will also help you decide if you want to include a board of directors.  Regardless, the incorporation papers provided by your state are ‘fill in the blank’ style and easy to follow.  Michigan’s fee is $60 for filing a for-profit corporation, and you can expect to receive a validated copy in approximately one month.

Step Two:  Get Your EIN Number from the IRS

This also sounds daunting, but it’s even easier than filing your state papers!  Plus, it’s free.

Once you receive your incorporation papers back from the state, you’ll need an EIN Number from the IRS to do pretty much anything.  You can’t open a bank account without, nor can you take online payments or file taxes.  Even nonprofit corporations need an EIN, so don’t skip this step!

With your incorporation papers in front of you, head to the IRS website and begin the process of applying for an EIN Number.  The site will walk you through a series of questions you will need to answer, including your business state ID (should be at the top of your state papers).  You will receive a PDF to download at the end of the process that officially states your EIN Number and IRS status.  Print this immediately and save the file.  The IRS will also mail you a copy, but that takes a while and multiple copies is always safer.

Step Three:  Open A Bank Account

So why was I talking about bankruptcy and suing at the beginning of the article?  There’s a business best practice called “piercing the veil”.  Essentially, by keeping your personal finances and business finances separate, you not only make things easier on your CPA (which is good because s/he’ll bill you hourly) but keep your personal savings and assets safe from any business mishap.  I say this not to scare you but to start you on the right foot.  If you spoke with a lawyer at Step One, you may have been told this already.

You’ll want a bank account for other reasons, too.  It makes tracking your business’ progress much easier since it’s not mixed with anything else.  It also makes business purchases more clear and easy for tax write offs.  Finally, it makes you look official, so when someone writes you a cheque or pays you online, they get a transaction notification and receipt from your business, not you.

With your State Papers and your EIN Number documentation, go to the bank of your choice.  I find it easiest to use the same bank for everything.  It’s one number to call, one system to memorize, and some banks charge you for digital transfers outside their system.  When at your bank, wait to sit down with an official, not a teller.  They’ll walk you through the paperwork and get you set up.

One last note, here.  Please oh please do not buy personal items from the business account, or vice versa.  This would ‘pierce the veil’ and blur the lines for any legal action.  Bad.  Instead, pay yourself by making a bank transfer from the business account to your personal account and annotate the transfer as income or owner pay.  Talk to a CPA to get even more advice about this (I’m not able to provide more because I’m not legally certified and can only tell you from my personal experience).

That’s it!  If something’s missing, please let me know in the comments below so I can help.

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  2. […] you have the papers from the state, you can file for your EIN number just like with a for-profit business.  You need these two documents to both open a bank account […]

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