to tell you that incorporation is the easy part of starting a business. If I did tell you that, I’d be lying. As it turns out, incorporating your business is the first of many steps. In my last post I shared a little about the different types of companies you can set up (LLC vs. Inc.). I’d like to share a little more with you now about what happens after you decide to incorporate.
isn’t fun for anyone. For a small business owner, paperwork is quite frankly a pain in the ass. The bigger companies can afford to employ lawyers, who oddly enough, seem to have an affinity for painfully dry paperwork. Small business owners are always trying to balance a tight budget and steep legal fees aren’t always in the plan. Anyway, back to the paperwork. After incorporating, the next two forms that need to be considered and/or completed are:
- 2553 – S Corp election
stands for Federal Employer Identification Number. If you’re not familiar with EIN (the F is typically dropped when talking about them), you can read more on this lovely IRS website. The short version of an EIN is that it serves as the business’s social security number. Like you’re social security number, the business will find that having one comes in handy here and there. Among other things, you’ll need an EIN to open a business bank account and to file taxes every year. The good news is that the IRS let’s you apply for an EIN online and once you know what you’re doing, the form can be completed in ~15 minutes (take the extra time to learn about them prior to applying).
If you haven’t had your fair share of paperwork, both from a learning standpoint and from a filing standpoint, you’re in luck! Yep, that’s right, there’s more! IRS form 2553 is an Election by a Small Business Corporation. What type of an election are you making with this one? Again, the short version of this is that once filed, the IRS will treat your business as a S corp rather than a C corp. Why is this important? Taxes of course.
By filling out and submitting the 2553, you’re telling the IRS that you want the business profits to pass through to you as an individual. Conversely, if you didn’t elect to be a S corp, the business would be responsible for taxes at the end of the year and then any income you earned from the business would be subject to tax on your personal return. Confused yet? I can understand if you are.
Paperwork when starting a new business is time consuming and abundant. It’s not just about getting the right forms completed and filed but also about UNDERSTANDING what each form is about and the advantages/disadvantages of each. The understanding part is going to take you time. In my opinion, the time you need to spend on the front end is well worth the proper structure and filings for your business.
As you might suspect, the answer is paperwork. To date, I have incorporated a business, obtained an EIN, and submitted my 2553 to the IRS. While you’re building your brand or website or marketing campaign or…the list goes on and on…additional requirements need to be met for an incorporated business. In my next post, I’ll take you through a Corporate Records book. Keep an eye out for more!