As a small business owner or entrepreneur, you have a lot on your plate — from boxing up products to staying on top of invoices. Opening an LLC or a corporation legally can be complex and confusing, but we’ve done the research for you.
Business formation services provide expert guidance through the process of opening a new business, making sure you’re following all local and federal laws. It also allows your new business to stay compliant and in good standing. In this article, we explain what you need to know before deciding whether a business formation service is right for you.
What Does Business Formation Mean?
When you form a business, you put in place a legal structure for your company. The type of business you create determines things like how you’ll register your business, how much personal liability you have as the owner, and how you’ll pay taxes. There are several steps to the business formation process that we’ll outline below.
Keep in mind that business formation and incorporation are not necessarily the same thing. You’re only officially incorporated when you choose to open a corporation, but there are several business entities that aren’t corporations. We go into more detail about the different kinds of business entities below, as well.
Best Business Formation Services
There are several ways to form a business. One option is to follow the steps we detail below and open a business on your own. It can be a lot of work to find a registered agent and file the correct documents, however, so if you want reassurance along the way, there are services that can help.
First, you could hire an attorney to walk you through the legal paperwork and make sure your business is compliant. On the other hand, if you’re looking for a more cost-effective route, consider working with a business formation service provider, which can be more affordable and simpler than paying attorney’s fees.
Here’s a list of the best business formation service providers we recommend to get you started.
Inc Authority is one of the more affordable options on this list because it doesn’t charge an additional fee for LLC or incorporation services — you only pay for state taxes. Its free service includes preparation of formation documents, a registered agent for the first year, consultations for tax planning, and a review of your business credit.
Also, you can pay for upgraded business start-up services like an operating agreement, tax consultation, web domain registration, and compliance notices every year.
With IncFile, you can start an LLC, corporation, or nonprofit for an affordable price. It offers free LLC, corporation, or nonprofit filing with the lower-tier Silver package, and you only pay taxes to your state. You also get a free registered agent for the first year. If you want to upgrade to other formation packages, you can pay $274 for the Gold package or $374 for the Platinum package that includes additional services like an employer identification number (EIN), an operating agreement, and a business banking account.
IncFile can also help with things like annual reports, banking and bookkeeping for additional fees.
Northwest Registered Agent
Northwest Registered Agent allows you to form an LLC, corporation, or nonprofit. Its Privacy By Default program gives you a business address, phone number, and mail forwarding to protect your personal information.
You can use the free account to walk through the process of starting a business. Otherwise, you can upgrade to the paid VIP account that starts at $39 per month and includes things like registered agent, state filing fees, and an EIN. This option helps businesses looking to start off with lower upfront costs, but you can also pay the entire cost up-front.
ZenBusiness has great reviews and a simple online dashboard for users to navigate. You can start an LLC or a corporation with ZenBusiness with filing prices starting at $0 plus state fees. The state fees depend on the state the business is formed in. Also, it costs extra for ZenBusiness to act as your registered agent, and prices vary.
With Rocket Lawyer, you can start an LLC, corporation, or nonprofit organization. Rocket Lawyer specializes in legal services and legal advice to ensure you stay compliant.
It costs $99.99 to file your formation documents, and a registered agent costs $149.99 more. If that’s too costly at one time, you can become a member for $39.99 per month and get free filing (except for state fees) plus get 25% off the cost for the registered agent. It also offers a 7-day free trial.
With Incorporate.com, you can launch an LLC, corporation, or nonprofit. One major advantage to this service is that it offers a Corporate Compliance Guarantee. This guarantee protects against mistakes the company makes when filing — it promises to either fix the issue or pay you up to $75,000.
The price depends on the state you’re filing in and the package you choose. The Starter package begins at $79, while the Essentials package costs $199 but includes preparation of an annual report and an EIN. The Works package costs $279 and adds an operating agreement and business license research. A registered agent costs an additional charge, depending on the state.
With Swyft Filings, the Basic package costs $49 (plus state taxes) and offers document filing, lifetime customer support, corporate compliance support with alerts for due dates, a business domain name, and one hour of tax consulting.
There are add-ons, like the Standard package for $149 plus state taxes or the Premium package for $299 plus state fees for help with things like an EIN, an operating agreement, a banking resolution, and web hosting. Its registered agent service costs extra — starting at $149.
What to Look For in a Business Formation Service
When you choose a business formation service, there are several questions to ask yourself:
- Do you need a registered agent? Acting as your own registered agent is complicated and could be worth spending money on. Most business formation services allow you to choose them as your registered agent.
- Do you need an employer identification number (EIN)? This essential number acts as the ID on your business taxes, and many business formation service providers will provide this for you for a fee. However, applying for an EIN through the IRS is free, fast, and easy enough to do on your own, so this service may not be worth paying for.
- Do you want additional services? Some business formation service providers offer extras like tax consulting, an operating agreement, a business address, or an annual report. Consider which ones, if any, would be most helpful to you.
- How much does it cost? Check how much the service charges to file your business documents, act as your registered agent, and upgrade your plan. Make sure to calculate the entire cost over the life of the service.
- Are the reviews good? Look for good customer reviews that prove other customers have been happy with the services provided. Also, check to see if professionals like our Nav team have reviewed their services and given them a thumbs up.
Types of Business Entities to Choose From
How you build your business impacts every moving part, from whether or not you can get financing to how you operate on a daily basis.
Picking your business structure is the first item on your to-do list when starting a business — and one you have to take before you register with the state or get any licenses. Consulting with tax professionals or business services experts can help you to figure out which entity type will serve you best, especially because switching to a different structure at a later date may bring penalties.
Here’s a breakdown of the different kinds of business entities you can create.
A sole proprietorship is the simplest structure and is made up of one person who retains total control of the business. You’re automatically a sole proprietor once you start doing business, unless you register as another entity.
The biggest difficulty of being a sole proprietor is that your business liability isn’t separate from your personal liability. So, if your business went bankrupt or got sued, your personal assets (like your home, savings accounts, and car) could be at risk. Also, it can be difficult to get business financing because you won’t have collateral you can offer, and banks tend to consider sole proprietors risky borrowers. This entity can work well for someone running a low-risk company or if you want to test the waters before diving in to create a more structured business.
A partnership involves two or more people. It’s a simple structure that can be one of two types: a limited partnership (LP) or a limited liability partnership (LLP).
In an LP, one partner has unlimited liability and pays self-employment taxes. All other partners have limited liability but also less control of the company. With an LLP, all partners have limited liability. Thus, each partner is protected from debts of the partnership and from the other partners. Either an LP or LLP could work well for several owners running one business, a professional group, or as a test run before incorporating.
Limited liability company (LLC)
With an LLC, your personal assets and liabilities are separate from your business’s. For example, if someone were to sue your company, they couldn’t also go after your home.
LLC owners don’t pay corporate taxes. Instead, your income and debts pass through to your personal income taxes. However, you have to pay self-employment taxes. An LLC is a great option for anyone looking to protect their personal assets while they run a medium- or high-risk business, or if you’re hoping to avoid paying corporate taxes.
Corporation (C corp)
In a standard corporation, also called a C corporation or C corp, the owner and the corporation are completely separate legal entities. A corporation can be more expensive to open and require more in-depth reporting and operating procedures, but the owners are more protected from personal risk.
Corporations sometimes face a double business tax: once when earning income and again when shareholders are paid dividends on their personal tax returns. A corporation can sell stock to raise funds, as well. This structure is best for businesses that need to raise money, have medium or high risk levels, or want to eventually sell the company or make it public.
Also known as an S corp, this type of corporation is similar to a C corp — but it dodges some of the double taxation. It’s able to avoid corporate taxes by passing some of its corporate profits and losses through to its shareholders. To become an S corp, you have to file with the IRS. However, not all states recognize S corps and will treat them like C corps. If you qualify as an S corp, it can be a great strategy to lower your taxes..
Also called a 501(c)(3) organization or a nonprofit, these entities do work that benefits the public. They focus on work for things like charity, science, or religion, and they have to register through the IRS. A nonprofit can be tax exempt, which means it doesn’t have to pay income tax. There are rules around how it can use its profits — profits can’t go toward political goals, for example.
Benefit corporation (B corp)
If your company is motivated by doing a public good as well as making a profit, it can become a B corp. To qualify, you must prove to shareholders that your work benefits the general public. B corps are taxed the same as C corps, and most states — but not all — recognize this status.
Closely held corporation
A closely held corporation, or a close corporation, is similar to a B corp but it has a less formal corporate structure. It cannot trade public shares, and there’s a limit to the number of shareholders the company can have. Also, it doesn’t need a Board of Directors to operate.
A cooperative is owned by its members who are also called user-owners. Anyone can buy shares of a cooperative to become a member. Elected officials run the cooperative and user-owners have voting rights.
How to Set Up an LLC
Whether or not you use an LLC formation service, there’s an order of operations to follow when forming an LLC. Here are the steps you’ll need to take.
- Choose a registered agent. A registered agent, also called a resident agent, is a person or company that agrees to receive legal documents and correspondence on behalf of your business. In most states, you must have a registered agent to form an LLC, although you are allowed to act as your own.
- Pick a business name. Your LLC needs a name before it can launch. Search for your desired name in a company name database to make sure it’s available. Your name needs to include “LLC,” L.L.C.,” or “Limited Liability Company.”
- File your LLC Articles of Organization. You’ll typically send in your Articles of Organization, also called an LLC State Form, to the Secretary of State. To complete this business filing, provide information like the name of your LLC and the registered agent.
- Apply for an EIN. An EIN is your federal tax ID number. Getting an EIN is quick and painless — you can apply using Form SS-4 on the IRS website and be approved in minutes.
- Create an operating agreement. An operating agreement describes all the inner workings of your LLC, from who owns it to how it’s managed. There’s no need to file it with the state, but it is an essential document for your company.
- Get a business bank account. It’s necessary to have a bank account for your LLC that is completely separate from your personal account. To open a business bank account, you’ll need to provide documents like the Articles of Organization, the EIN, and the operating agreement.
- Bankroll the LLC. Your company needs money to get going. After you decide how much the LLC needs to start, every member that adds part of the total gets proportional interest in return.
- Complete reports and pay taxes. You may need to file areport annually (or every two years), or complete other requirements for your state. The documents and tasks you need to complete depend on where your business is located.