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Do I Need a Lawyer To Incorporate?

Lawyer Providing Guidance

Starting a new business can be expensive, and it is often tempting for owners under financial stress to look at incorporating without an attorney. The good news is that if you have the time and skills to do the research, prepare the paperwork needed to register with the state, and draft the necessary legal documents, it is possible to incorporate a small business without hiring a lawyer.

However, that route also involves risk. Suppose you are unsure how to structure your business or are concerned that you cannot draft the documents correctly. In that case, it is usually worthwhile to seek the assistance of an experienced attorney. An attorney can help you assess whether your business needs to incorporate, find the most beneficial corporate structure, and prepare and file the necessary documents. Most importantly, working with a lawyer will ensure that the incorporation documents properly shield you from liability for your business's debts.

What Does It Mean To Incorporate a Business?

When you incorporate a business, you are setting it up to operate as a separate entity with legal rights recognized by the state. The most significant advantage of incorporating your business, as opposed to running it as a sole proprietorship or a partnership, is that it shields you from liability for its debts and other financial obligations. In other words, if your business is unable to pay its bills, its creditors can't sue you for payment.

Traditionally, smaller businesses have avoided incorporating C-corporations because it usually resulted in what is often referred to as "double taxation." That is where income is subject to the corporate tax when earned by the corporation. Income is taxed again when it is distributed to its owners as dividends. But, in recent years, small to mid-sized businesses that qualify have had the option of forming S-corporations where income is passed through to owners and taxed as ordinary income. Speak to a business formations attorney to discuss whether you meet the requirements for an S-corporation.

A business that has chosen to incorporate is usually required to follow certain corporate formalities to keep its corporate status. Corporate formalities are the rules and guidelines the company must follow. Those formalities often include:

  • Maintaining corporate bylaws
  • Conducting business under its own name
  • Holding annual shareholder meetings
  • Keeping accurate financial and meeting records
  • Keeping its finances separate from those of its owners

A corporation's failure to follow corporate formalities may result in its owners being held liable for its debts. Personal liability allows creditors or tax authorities to seize your personal assets to settle corporate debts and financial obligations.

What Does a Lawyer Do When a Business Incorporates?

An attorney that is guiding a business through the incorporation process will usually assist the owners with the following tasks:

A lawyer can be beneficial during the incorporation process by ensuring the corporation complies with securities laws and regulations when issuing stock to shareholders. In most cases, when a small business incorporates, it is considered a closely held corporation that is exempt from most regulations. But it is still a good idea to get a lawyer's opinion on whether your business is exempt.

Pre-Incorporation Agreements

If you are forming a corporation and plan to share ownership, know that owners often sign a pre-incorporation agreement. In case of a dispute between yourself and the other owners, a contract can often provide a mechanism for resolving them without resorting to litigation.

Pre-incorporation agreements usually address such issues as:

  • How much each shareholder will invest in the business
  • How loans made to the company by shareholders are repaid
  • What corporate offices will be held by the shareholders and the compensation they will receive
  • The fringe benefits available to shareholders
  • Buyouts when a shareholder leaves the company

Do You Need an Attorney's Help With Incorporation?

An experienced local attorney can help you assess whether incorporating is the best option for your business and help you choose the type of corporation you should use. Additionally, a lawyer can guide you through the incorporation process and ensure that you have taken all necessary steps to protect your assets and avoid future problems.

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