Once You've Decided to Incorporate

Once you've decided to incorporate your business, you have more decisions to make. You have to decide which type of corporation to form and where to incorporate. You're entitled to incorporate in any state in the U.S., rather than just the state in which you live and work. There might be good reason for this — another state might offer better tax treatment or more flexible incorporation laws. However, if you do incorporate in another state, you'll have to register as a foreign corporation in your home state.

If you're planning a for-profit venture, the choices are C or S corporations or a Limited Liability Company (LLC). The main difference between a C and S corporation is the way profits are taxed. The basic setup procedures are the same, except that an S corporation requires the further step of an additional IRS filing. Your state may impose additional filing requirements as well.

S corporations are often recommended for startups and small businesses, because profits (and losses) "pass through" to the shareholders to be claimed on individual tax returns. C corporations pay corporate income taxes directly to the government. There are a few other differences, mainly regarding corporate stock allocation and the potential number of shareholders.