One of the first issues that a business must make when it starts up or reaches a significant level of success is what form to choose for the business. Many businesses choose to incorporate as a standard business corporation.
Before you choose to incorporate, you should consider the relative benefits of selecting a different form for your business, particularly the possibility of forming as a limited liability company (LLC). Many of the benefits extended to a corporation, including limited liability, are also enjoyed by an LLC, but typically at a lower cost and without the accounting and procedural requirements imposed on corporations.
When you name your corporation, you should check to see if there are any other businesses that have registered your preferred name with the state.
- If another active business has registered the same name you desire, you will not be permitted to use that name.
- You may also find that state law restrictions prevent your registering a corporation under the name you have chosen, and that you must select a different name in order to successfully register your corporation.
Even if no other business has registered the name with the state, you should take additional steps before registering your corporation under that name.
Check with the counties in which you intend to do business, to see if any DBAs (additional names under which businesses operate) have been filed, reflecting that another business may be using the name you have chosen.
Check with any state trademark registries and search the federal trademark database offered by the United States Patent and Trademark Office (USPTO), along with your state's trademark office, to see if anybody has registered a trademark or service mark which would be infringed by your chosen name.
If you plan to expand your business into other counties or states, do your homework in advance: check for businesses that may have conflicting names or trademarks before you choose a name, as it may be costly and cumbersome to later change your name when you expand into those regions.
Check to see if the name that you have selected for your business has a secondary meaning, perhaps a slang definition or a meaning in a foreign language, that may make it a poor choice of name for your company.
A corporation's name must conform to state laws requiring that it reflect the corporate status of the business organization. That is normally accomplished by including words or abbreviations such as "Corporation", "Incorporated", "Corp", "Co", or "Inc", in the business name.
As you proceed toward incorporating your own business, you should consider purchasing a corporate kit that will assist you in getting your corporation started.
A typical corporate kit includes a set of standard bylaws that you can use as a model when you draft your corporation's bylaws, blank stock certificates and a stock transfer ledger, a corporate seal, forms for keeping records of meetings of the Board of Directors and minutes from those meetings.
You may assemble your own kit and will likely save some money in the process, but that can be a time consuming process and corporate kits are not expensive.
A corporation's directors typically engage in action including the election of corporate officers, the issuance of stock, oversight and approval of major financial transactions, and approving compensation packages for executives and officers of the corporation.
Depending upon the laws of your state your corporation must have at least one director, and possibly more than one director. Most people who start corporations make themselves directors. When a single person is starting a corporation and a second director is required, many people name their spouse.
In most states, the names and addresses of the initial directors must be included in the articles of incorporation. When privacy is an issue, it may be possible to appoint only the minimum required number of directors before incorporating, or to vote to replace an initial director or directors once the corporation is formed so that the newly appointed directors aren't identified in state records.
A registered agent is the person designated to receive service of process and certain important documents on behalf of a corporation. You must declare a registered agent when you file your articles of incorporation.
It is important to choose a responsible person with a stable address, so that you can be certain that any documents served on the corporation are in fact properly received. Often, the registered agent is a principal or officer of the corporation.
A corporation may also hire an attorney or commercial services to act as the registered agent, usually for a modest annual fee.
When you form a corporation, your first step is to file articles of incorporation with the state in which you desire to incorporate along with the required filing fee. Most states offer approved fill-in-the-blank forms for preparing and submitting articles of incorporation.\
States typically require that articles of incorporation include:
The name of the corporation;
The address of the corporation;
The identity of the corporation's registered agent; and possibly
The names of the directors of the corporation.
You may also have to declare a "par value, or minimum sale price, for your stock. In some states you can declare a par value of $0.
In some states you must publish an announcement of your incorporation or a copy of your approved articles of incorporation in a newspaper of record, a newspaper that is legally qualified to publish legal notices, and must subsequently file proof of publication with the state.
You can usually find out if your local newspaper qualifies to publish your notice by inquiring with the state or with the paper itself.
A corporation's bylaws govern its operation, including the rights of each class of shareholders, rules on the issuance of stock, the location and terms for inspection of the corporate books, and the powers of the corporation's officers and directors. The bylaws usually define:
- The time and place for the corporation's meetings, including the annual meeting,
- The corporation's fiscal year,
- The manner in which directors and officers are to be selected and compensated, and
- The manner in which the bylaws themselves can be amended.
You can obtain sample bylaws from a wide variety of sources, often including "how to incorporate" books at a local library or book store, corporate kits, office supply stores, and possibly from a state agency or a state website.
Many new corporations will benefit from having an attorney draft their initial bylaws, or review their draft bylaws for their legality and completeness before they are formally adopted by the corporation.
At the first meeting of the Board of Directors, the directors will ordinarily formally adopt the corporation's bylaws. The directors will also authorize the initial distribution of stock to the corporation's shareholders.
The directors will also elect the corporate officers. The officers of a corporation oversee its daily operations and activities.
Most states require that a corporation designate as officers a President (and possibly a Vice President), Secretary, and Treasurer. In basic terms:
- The President of a corporation has authority to direct its business operations,
- The Secretary has authority over the corporation's records,
- The Treasurer has authority over the corporation's finances.
Most states permit corporations to appoint one person to all three officer positions.
When you incorporate a business, the IRS automatically classifies the corporation as a C Corporation. A C corporation files its own tax returns, and pays taxes on its retained income at the corporate tax rate.
A corporation may also elect to be classified as an S Corporation. S corporations have pass-through taxation, meaning that the corporation's income is distributed to its shareholders who declare the income on their personal tax returns. Not all corporations are eligble to be S corporations, with the primary factors preventing election of S status being the number of shareholders, foreign ownership and a desire to issue multiple classes of stock.
A new corporation that is considering whether it would benefit from electing S status should review its situation with its business lawyer or a financial professional, in order to ensure that it selects the best approach to minimize its overall tax obligations. The corporation should also keep in mind that it has a limited period of time to elect S status and, once that window expires, it will be taxed as a C corporation for the current tax year.
Although many new corporations will be exempt from state and federal securities laws, the possibility exists that state and federal securities laws will apply to the corporation and its conduct.
- If shares are to be distributed or sold to more than a limited set of shareholders (typically about thirty-five shareholders), the corporation may have to register with the securities authorities of the state and federal governments before it may lawfully issue the shares.
- Securities laws may also be implicated by the issuance of stock options to employees.
In advance of taking action that might implicate those securities laws, corporations and their officers should take care to fully understand how securities laws apply to their situation.
Although not technically part of forming a corporation, it is important that you determine the state and local licensing requirements for your business, and obtain any required licenses and permits for your new corporation.