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How and Why To Incorporate Your Business

How and Why To Incorporate Your Business If you're self-employed or a freelancer, and your business is growing, it may be time to consider incorporating as one of the formal types of businesses available. There are many reasons to choose one of the many options for this and a few reasons not to, if the time's not right. Whichever one of the different types of businesses you choose to go with, there are some important considerations you should make and some essential steps you'll have to take.

Table of contents

What is a corporation?...Read more

Pros and cons of incorporating...Read more

How to form a corporation...Read more

What kinds of corporations are available?...Read more

What is a corporation?

Corporation examples like Boeing or Google are common, and we often hear this familiar word in the news, for example, but just what is a corporation? These are examples of a C-Corp, but a corporation can be any formal business entity recognized by the state government where you incorporated the business. The types of businesses considered corporations include LLC, S-Corp and nonprofit.
Image of text listing different types of corporate structures including Partnership, Limited Liability Corporation, S Corporation, C Corporation, and Nonprofit. No mention of self employed, 1099, freelancer, or taxes.
A big distinction between a formal corporation and other informal types of businesses, like a sole proprietorship, is liability. Corporations are liable for their actions and are responsible for their finances, not owners. Corporations can, for the most part, be lumped into two categories: for-profit, which is what most businesses are, and nonprofit, which is what most charitable organizations are. Of course, taxes are a big part of choosing your business entity. Regardless of how you choose to incorporate, self-employment taxes or estimated taxes will need to be paid.

Pros and cons of incorporating

As with everything in life, there are benefits and drawbacks to each business structure. You may be working for yourself and running your business with complete control over every aspect. But your business may also be growing. Incorporation might offer you certain tax benefits, and with those benefits might come greater oversight by the state government and less decision-making power.
Image discussing the pros and cons of incorporating a business. Benefits include no liability, legitimacy, and protected finances, while drawbacks include paperwork, fees, and higher taxes. Relevant for self-employed, 1099, and freelancer individuals.

How to form a corporation

Usually, a corporation is formed in the state where the business is operating, although that's not necessary. Some business owners prefer to incorporate in states with certain regulations.
Image outlining the steps to incorporate a business: choose a name, file articles of incorporation, draft by-laws, and list partners/shareholders. No mention of self-employment, 1099, freelancer, or taxes.

What kinds of corporations are available?

The rules for incorporation can vary from state to state, but most states offer the following legal structures to incorporate your business: LLC An LLC or legal liability company combines two models: a sole proprietorship and a partnership. LLCs can have a bank account, hire employees and buy property. The owner of an LLC is called a member, and LLCs can have a single member or multiple members who own different percentages of the business. Even though multiple members are allowed, a person who is not a founding member of the LLC can't purchase ownership in the company. Essentially this means that the LLC can’t sell stock like a corporation can. S Corp With this incorporation structure, owners are eligible for a corporate shareholder’s limited liability, so they're not responsible for their company’s debt or losses. The owners of an S Corpcan have two kinds of shares in the company that either give them voting rights or not. All owners of S Corps need to pay taxes as if they’re a member in a partnership or a sole proprietor. Partnership Partnerships are formed when two or more individuals join together with the same business objective in a formal agreement. Partners share profits and liabilities based on the individual contract terms. After sole proprietorship, partnerships are the simplest form of a business entity defined under U.S. law. Sole proprietorship A sole proprietor is a person who owns an unregistered or unincorporated business called a sole proprietorship. The business owner is also the only employee and has the liberty to make decisions on the business's behalf. This person is also responsible for paying personal taxes and any business liabilities. C Corp This type of corporation is owned by shareholders and governed by the laws established by them. Shareholders are taxed separately from the C Corporation, and they are required to vote on a board of directors and hold annual meetings. Large corporations like Apple and Walmart are examples of this kind of corporation. Nonprofit These are organizations that take in money and spend it in ways that address a social cause or have a public benefit rather than setting out to make a profit. Nonprofit status is famous for meaning that an organization doesn't have to pay tax on things every private individual has to pay, like sales and property tax.

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