Should I Use an Online Incorporation Service?
We think that taking a do-it-yourself route to incorporation makes sense for anyone on a budget. But that said, we totally understand that not everyone wants to take the time to carefully prepare the formation and tax accounting documents for setting up a small business corporation. Accordingly, we want to provide two tips for people selecting and using an incorporation service.
Tip #1 - Understand What the Document Preparation Service Does
A problem that pops up whenever any of us buy a service is understanding exactly what the service is. And this problem is something you particularly need to watch out for when you're talking about incorporation services, also known as "document preparation services".
Incorporation services perform the following services for you:
1. Perform a name search.
A name search of your state's corporations database minimizes the chance the name you select is already being used. Note, by the way, that using the state's Secretary of State web site, this name search is typically a quick check using a public database of already-in-existence names.
2. Prepare your articles of incorporation.
This document, which is almost always a simple, fill-in-the-blanks form, creates your new corporation. Note that the form may always being mailed in, but can sometimes also be faxed or entered online for expedited processing. In general, the online services charge you extra for expedited processing. Often the state does too.
3. Prepare, and possibly submit, an Employer Identification Number application.
This tax form gets you the taxpayer identification number you need in order to gain tax benefits from your new corporation and may be required to open a bank account.
4. Supply sample corporate by-laws.
In order to use your corporation for liability protection, you need to have and follow corporate by-laws. Accordingly, the incorporation service typically supplies you with sample corporate by-laws.
5. (Optional) Prepare an Subchapter S Election document.
To have your new corporation treated as an S corporation, you'll also need to prepare and submit a timely S election. This election, by the way, must be submitted by the 15th day of the third month of the year. This means that existing corporations must elect by March 15; note that new corporations can elect S status for their first year roughly 75 days after the incorporation date. In other words, if you incorporate on May 1, you have until July 15 to elect S status.
Note: All of the above steps are also covered in our do-it-yourself kits, too. For example, you get instructions for performing a name search, for preparing all of the forms, and you receive sample by-laws.
Tip #2 - Understand What Document Preparation Services Don't Offer
What the document preparation, or incorporation services, don't offer is advice specifically tailored to your circumstances. And legally, they can't.
Only attorneys can offer legal advice. And only attorneys, certified public accountants and enrolled agents can offer tax advice.
What this deficiency in service means is simple: If you need professional advice, you really ought to work with a local attorney or accountant. Of course, this advice costs money: at hourly rates of $200 an hour or more, you can quickly find yourself spending $500, $1,000 or more on legal or tax advice, which is why many new business owners fall right back into the option of using an incorporation service. But if you need coaching and counseling specifically tailored to your new venture, you really ought to consider working face-to-face with a local professional.
A Final Warning about Incorporation Services:
One quick caution about working with an online incorporation service. Not all perhaps, but certainly some of the online incorporation services steer their customers into decisions that only jack up your legal costs. You don't need someone to act as your registered agent in your home state, for example. And you need to be very careful about incorporating in some "other" state like Delaware or Nevada for tax or legal benefits. Incorporating in another state absolutely increases your incorporation costs and requires you to buy over-priced registered agent services, but often gets you only minor legal benefits and shady tax savings.
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