How–and Why–to Incorporate Your Business –

Opinions expressed by Entrepreneur contributors are their own. The term corporation comes from the Latin corpus, which means body. A pot is a body — it is a legal person in the eyes of the police. It can bring lawsuits, can buy and sell property, abridge, be taxed, and even commit crimes. It ‘s most celebrated feature : a corporation protects its owners from personal liability for corporate debts and obligations — within limits.

The pot is considered an artificially make legal entity that exists discriminate and aside from those individuals who created it and carry on its operations. With arsenic short as one incorporator, a corporation can be formed by simply filing an application for a charter with the respective state. By filing this application, the incorporator will put on record facts, such as :

  • the purpose of the intended corporation,
  • the names and addresses of the incorporators,
  • the amount and types of capital stock the corporation will be authorized to issue, and
  • the rights and privileges of the holders of each class of stock.

Why Incorporate?
It is true that operating as a pot has its share of drawbacks in certain situations. For case, as a business owner, you would be responsible for extra read keeping requirements and administrative details. More authoritative, in some cases, operating as a pot can create an extra tax burden. This is the last thing a business owner needs, particularly in the early stages of mathematical process.

Remember, aside from tax reasons, the most park motivation for incurring the cost of setting up a pot is the recognition that the stockholder is not legally liable for the actions of the pot. This is because the corporation has its own separate universe wholly apart from those who run it. however, let ‘s test three early reasons why the corporation proves to be an attractive vehicle for carrying on a business.

  • Unlimited life. Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.
  • Transferability of shares. It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member. The process of divesting yourself of ownership in proprietorships and partnerships can be cumbersome and costly. Property has to be retitled, new deeds drawn, and other administrative steps taken any time the slightest change of ownership occurs. With corporations, all of the individual owners’ rights and privileges are represented by the shares of stock they hold. The key to a quick and efficient transfer of ownership of the business is found on the back of each stock certificate, where there is usually a place indicated for the shareholder to endorse and sign over any shares that are to be sold or otherwise disposed of.
  • Ability to raise investment capital. It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.

Advantages of Incorporating

  • Owners are protected from personal liability fro company debts and obligations.
  • Corporations have a reliable body of legal precedent to guide owners and managers.
  • Corporations are the best vehicle for eventual public companies.
  • Corporations can more easily raise capital through the sale of securities.
  • Corporations can easily transfer ownership through the transfer of securities.
  • Corporations can have an unlimited life.
  • Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to “double taxation” on profits. To avoid this, many business owners elect to operate their corporations under subchapter S of the Internal Code. Also known as an S corporation, this entity allows income to pass through to the individual shareholders.

Disadvantages of Incorporating

  • Corporations require annual meetings and require owners and directors to observe certain formalities.
  • Corporations are more expensive to set up than partnerships and sole proprietorships.
  • Corporations require periodic filings with the state and annual fees.

Getting Started

To start the action of incorporate, contact the repository of state of matter or the department of state office that is responsible for registering corporations in your department of state. Ask for instructions, forms and fee schedules on business incorporation. It is potential to file for incorporation without the help of an lawyer by using books and software to guide you along. Your expense will be the cost of these resources, the file fees, and early costs associated with incorporating in your express.

If you do file for incorporation yourself, you ‘ll save the expense of using a lawyer, which can cost from $ 500 to $ 1,000. The disadvantage of going this route is that the march may take you some time to accomplish. There ‘s besides a chance you could miss some little but important contingent in your state of matter ‘s law. You may besides choose to use an incorporation overhaul company to prepare and file the documents with the department of state. One of the foremost steps you must take in the incorporation serve is to prepare a certificate or articles of incorporation. Some states will provide you with a print form for this, which either you or your lawyer can complete. The information requested includes the proposed diagnose of the pot, the purpose of the pot, the names and addresses of the parties integrate, and the location of the principal agency of the corporation.

The pot will besides need a set of bylaw that describe in greater contingent than the articles how the corporation will run, including the responsibilities of the shareholders, directors and officers ; when stockholder meetings will be held ; and other details authoritative to running the company. once your articles of internalization are accepted, the secretary of department of state ‘s office will send you a certificate of internalization.

Where to Incorporate
One major decisiveness to make when incorporating involves selecting the proper state of incorporation. You ‘re not required to incorporate in the state where your occupation operates ; you can choose from any one of the 50 states or the District of Columbia. A corporation is referred to as a foreign pot in all states except for the country where it is incorporated. If a pot is transacting business in a state other than where it was incorporated, it may be required to register for a certificate of assurance to transact business ( besides called foreign qualification ) in the other state. If a pot is transacting business and fails to register as a foreign corporation, it may lose entree to that submit ‘s courts and face tax fines and penalties. A alien corporation that registers for a certificate of authority in another department of state must pay state filing fees for the reservation file ; these fees are typically more expensive than the cost of filing for a domestic corporation. besides, alien dependent corporations are subject to taxes and annual report fees from both the state of internalization and the qualifying state. therefore, the actual advantage of incorporating in a state with identical low initial filing fees and low corporate income tax is not american samoa capital as it appears if your business must distillery qualify to do commercial enterprise in its state of operations. The definition of “ transacting business ” depends on the state and the position. Consult your lawyer to determine how the law applies to your site. In general, though, some factors that a state considers when determining whether a pot is transacting occupation in a state include :

  1. Does the corporation have a physical presence in the state?
  2. Does the corporation have employees in the state?
  3. Does the corporation accept orders in the state?
  4. Does the corporation have a bank account in the state?

note that merely transacting business via chain mail order or the Internet typically does not equal transact business ; however, the determination is made on a individual footing. Again, consult your lawyer for specifics, as this number is not intended to be comprehensive. How Incorporating Affects Funding
If you plan to seek investment, the prefer entity of most investors and VCs is the C corporation, which is the standard pot formed by incorporating. Limited Liability Companies, Limited Liability Partnerships and other entities are not favored due to the variation in rules between states and because they do not have the legal structure of shareholders, a board of directors and officers, which are criterion components of investment.

If you have less than 35 shareholders, you ‘ll probably want to elect to be an S pot for tax purposes. You must file the election shape 2553 within a short-change clock time after incorporating, therefore be surely to check with the IRS regarding the file and the deadlines. If you need to expand beyond 35 shareholders in the future, you can change your tax condition back to a C corporation to do sol.

Anytime you ‘re dealing with investor-related agreements and stock grants, you ‘ll want to work with a securities lawyer. These areas are complex and vital to making sure you retain control and future benefits from your company. As a side note, the lawyer you work with normally should not be a stockholder or a dining table member of the company. If he or she suggests this, then you should discuss the Professional Responsibility Rules of his or her State Bar with the lawyer, telephone the State Bar lawyer ailment pipeline to discuss the position and make certain his or her actions are ethical .

Running Your Corporation

here ‘s a summation of who plays what roles in a pot :

  • Board of directors: The original directors are designated in the Articles of Incorporation, which is the document filed with the state to legally form the entity. Directors oversee the officers of the company and assure that it operates according to law and corporate procedures. Directors have a fiduciary duty to the corporation to act in the corporation’s best interest, not to their own best interest, among other legal duties. These duties are to protect the shareholders’ investments in the corporation. Investors often want at least one representative on the board of directors, since the board formally controls the decisions of the company. However, sometimes investors avoid having any directors and arrange other contractual alternatives in order to avoid the fiduciary duty requirements to act for the benefit of the corporation rather than themselves. The board of directors appoints and may fire the corporation’s officers, who are responsible for the day-to-day operations of the company.
  • Shareholders: Shareholders are people who’ve been granted stock by the corporation in exchange for money paid or services performed for the corporation. The shareholders meet annually, at the corporation’s annual meeting, to elect the board of directors. Shareholders are not financially liable for the debts of the corporation and are not legally liable for any wrongdoing of the corporation. Investors will be granted shares in exchange for their investment. Typically, they will want “preferred shares, which means that if there are minimal dividends or other negative financial events, they will have priority in getting their money over the “common stock” shareholders.
  • Officers: Officers typically include at least a CEO and/or president, secretary and treasurer/CFO. Officers do not have the same heightened level of fiduciary duties to the corporation that the board of directors has.

After You ‘ve Incorporated
Once you ‘re incorporated, be certain to follow the rules of incorporation. If you do n’t, a court can pierce the corporate humeral veil and hold you and the other owners personally liable for the business ‘s debts. It is important to follow all the rules required by state police. You should keep accurate fiscal records for the pot, showing a separation between the corporation ‘s income and expenses and that of the owners ‘.

The corporation should besides issue stock, file annual reports and hold annual meetings to elect officers and directors, even if they ‘re the lapp people as the shareholders. Be certain to keep minutes of these meetings. On all references to your business, make certain to identify it as a pot, using Inc. or Corp., whichever your state requires. You besides want to make indisputable that whomever you deal with, such as your banker or clients, knows that you are an officeholder of a pot. To make certain your corporation stays on the mighty side of the police, heed the stick to guidelines :

  • Call the secretary of state each year to check your corporate status.
  • Put the annual meetings (shareholders’ and directors’) on tickler cards.
  • Check all contracts to ensure the proper name is used in each. The signature line should read “John Doe, President, XYZ Corp.,” never just “John Doe.”
  • Never use your name followed by “dba” (doing business as) on a contract. Renegotiate any old ones that do.
  • Before undertaking any activity out of the normal course of business–like purchasing major assets–write a corporate resolution permitting it. Keep all completed forms in the corporate book.
  • Never use corporate checks for personal debts and vice versa.
  • Get professional advice about continued retained earnings not needed for immediate operating expenses.

This article was excerpted from the books Start Your Own Business and Entrepreneur Magazine ‘s Ultimate Book on Forming Corporations, LLC ‘s, Sole Proprietorships and Partnerships , and the articles “Incorporation: Giving Form to Your Business” by Judith Silver and “Incorporating Your Business” by Rick Oster.

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