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How To Incorporate a Business

Starting a small business can be exciting, but many business owners are often confused about the types of corporations and the best way to legally structure their enterprise. Incorporating can offer many benefits, including protecting personal assets from business debts. Here's a simple guide to help entrepreneurs navigate the incorporation process.

As you plan how your business will grow, there are a number of business structures to consider. While the process can be detailed and state-specific, this article outlines the general steps and considerations for incorporation.

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1. Choose a Business Name

When you go about choosing a name for your corporation, you should be aware of the rules that your state follows when it comes to corporate names. Contact the office in your state that deals with corporations to find out these rules if you are not already familiar with them. The following rules are common to many states:

  • The name of your corporation cannot be the same as any other corporation that is on file
  • The name must end with some designation that shows the corporate status of your business, such as "Corporation," "Incorporated," or "Limited." In addition, many states allow abbreviations of these words (such as Corp., Inc., or Ltd.)
  • The name cannot include any words that imply an association with the federal government or restricted types of businesses. Such restricted words include "Bank," "Cooperative," "Federal," "National," "United States," or "Reserve"

Generally, you can submit a proposed name to your state's corporation office to see if the name would be an appropriate and allowable one. However, keep in mind that if you plan on operating your business under a name that is not the name of your corporation, you must file a fictitious or assumed name statement with the state or county in which your business is headquartered.

2. File the Articles of Incorporation with the State

The articles of incorporation are sometimes referred to as the certificate of incorporation or a charter, depending upon the state that you are in. Filing the articles of incorporation is a pivotal step in the incorporation process. These documents provide essential details about the new business, such as its name, purpose, and information about its shares and shareholders. The state uses these articles to recognize the business as a legal entity.

Once the articles are prepared, they must be submitted to the appropriate state agency. This is usually the Secretary of State's office or a similar department. There is usually a filing fee associated with filing this document. 

You will need to name a person who is responsible for receiving documents on behalf of the corporation. This person will serve as the "registered agent" for the corporation. This is the person that the members of the public will contact if they want to sue the corporation or involve the corporation in an ongoing lawsuit.

After approval, the state will issue a certificate of incorporation. This officially marks the birth of your incorporated business. Remember to keep a copy of these articles filed for your records. They are a foundational document for your corporation.

3. Draft Corporate Bylaws

Many small business owners who have gone through the process spelled out above often overlook and miss this very important step. The bylaws of a corporation spell out how the corporation will be run with respect to important decisions and voting rights. Corporate bylaws need to address when and how often shareholder meetings will be held, as well as spell out various other important rules. The bylaws will generally be adopted for the corporation at the first meeting of the directors.

4. Appoint a Board of Directors

Directors are generally responsible for making major financial and policy decisions for the corporation, such as authorizing the sale of stock for the corporation. Although many owners simply appoint themselves as directors of the company, there is nothing that requires directors to be owners of the corporation.

A majority of states allow a corporation to have one director no matter how many owners there are of the corporation. However, there are other states that require the number of directors to equal or exceed the number of owners.

5. Draft Shareholder's Agreements

Another important document that is often overlooked is a shareholder's agreement. All shareholders should agree upon this agreement, which will spell out various issues related to shareholders such as how ownership will be transferred in the event that a shareholder dies, becomes disabled, or wishes to leave the corporation.

6. Hold the First Meeting of the Board of Directors

After all the above steps have been followed, it is time for the board of directors to hold their first meeting. At this first meeting, a number of corporate formalities must be taken care of, including:

  • Setting the corporation's fiscal accounting year
  • Choosing and appointing corporate officers
  • Setting and adopting the corporate bylaws
  • Authorizing and issuing the shares of stock
  • Settling on the official stock certificate form and adopting the corporate seal

In addition, if the corporation is to be an S-type corporation, the directors should vote on and approve the election of an S-type corporation.

7. Issue Stock and Register Securities

A corporation should not open its doors for business until the shares of stock have been issued. When shares of stock are issued, the ownership of the corporation is formally divided amongst all the owners. In addition, issuing stock is a requirement that must be met before the corporation can do business.

When you issue stock, you are entering the world of securities laws. Generally speaking, large corporations that issue stock must register all of their stock offerings with the Securities Exchange Commission (SEC) and any state securities agencies. This can take time and cost a bit of money.

When your corporation is ready to issue the actual shares, you will have to keep detailed documents of:

  • The names of all of the initial shareholders
  • The number of shares that each shareholder will buy
  • How each shareholder is going to pay for their shares

You will then issue the stock certificates to each shareholder that bought into the corporation. You may also have to file a notice of stock transaction if your state's laws require it.

8. Apply for Exemptions to Securities Registration (Small Corporations)

Most small corporations that do not make a private offering of stock to more than 35 people may be exempt from having to register their stock offerings with the SEC. In addition, if a corporation only makes a private offering to those who can reasonably be expected to take care of themselves because of their personal financial situation, that private offering may also be exempt from the SEC registration rules. Additionally, many states have adopted exemption rules that mirror or are very similar to the SEC rules.

9. Get Necessary Business Licenses or Permits

If you plan on your corporation entering into a business that requires a license or a permit, be sure to get those soon. In addition, you will most likely need a tax registration certificate for both federal and state taxes. Keep in mind other licenses and permits as well, such as an employer identification number (EIN) from the IRS, a seller's permit, a liquor license (if needed), a zoning permit, etc.

10. Understand Corporate Taxes

Corporate taxes can sometimes seem like a maze for new business owners. Understanding them is paramount for the financial health of the corporation. At its core, a C corporation is treated as a distinct tax entity, separate from its owners and shareholders. This means the corporation itself must pay taxes on its profits at a specified tax rate. 

This separation offers a crucial advantage: liability protection. This protection ensures the personal assets of shareholders are shielded from corporate debts or potential lawsuits against the company.

However, one of the nuances of C corp taxation is the phenomenon of double taxation. When a corporation earns profits, it pays taxes on its corporate income. Then, if these after-tax profits are distributed as dividends to shareholders, they are taxed again on the shareholders' personal income tax returns. 

Alternatively, other structures like the limited liability company (LLC) offer pass-through taxation. In this setup, business profits and losses flow directly to the owners' personal tax returns, bypassing corporate tax.

On the upside, corporations have the advantage of deducting various business expenses, from salaries to operating costs. This can significantly lower their taxable income. It's essential for business owners to familiarize themselves with these intricacies. Seek professional guidance if needed to navigate the corporate tax landscape efficiently.

11. Get Legal Help With Incorporating Your Business

Corporations are the most complex business legal structures to form and typically require some degree of professional legal assistance. A lawyer can help verify that you have chosen the right business structure for your purposes and ensure that it is properly established. Contact a local business organization attorney today and give your business the best possible chance for success with professional legal advice.

Prefer to DIY? Consider using a reputable online business formation service to make sure you do everything needed to incorporate correctly in your state.

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