When you open a business, you think about the products or services you will offer, your advertisements of the grand opening, your location and how you will get customers.
The supplies or equipment you need also comes to mind.
The structure of your business is a critical part of your business organization and operation that is often forgotten. Whether you choose to do business as a corporation carries significant legal consequences, particularly whether you become personally liable for debts of the business. By incorporating your business, your house, personal vehicles and other property are not placed at risk if your business is sued. This is because shareholders or owners of corporations are liable only to the extent of their investment. While avoiding personal liability is important, you also need to select the right structure that prevents you from paying taxes twice on the profits of your business.
The Ten Steps to Incorporating Your Company
- Choose the Right Name
- Designate a Registered Agent
- File Your Articles of Incorporation
- Choose Initial Directors and Officers
- Adopt Bylaws
- Prepare a Shareholders’ Agreement
- Issue Stock
- Open Corporate Bank Account
- Obtain Tax ID Number
- Elect “S Corporation” Status
The Top Ten Steps Explained
Your choice of a corporate name comes with numerous legal considerations. Consult your state’s corporation or business licensing office and the U.S. Patent and Trademark Office to ensure that no one else currently uses your proposed name. State laws also render off-limits names that imply affiliation with or status as a governmental or official agency. In many jurisdictions, you must hold a professional license to even use the word in your corporate name. Such words include lawyer, physician, psychologist or engineer.
A corporation’s registered agent receives lawsuits, other court papers and official notices on behalf of the corporation. Receipt of the paper by the registered agent equates to service on the corporation. Many corporations, especially larger ones, engage companies that serve as registered agents. Corporate officers can also suffice for registered agents.
The name, registered agent, your primary office or headquarters constitute some of the items on the articles of incorporation. You file this document with your secretary of state or business registration office. It functions somewhat as a “birth certificate” for corporations. Many secretary of state or registration offices provide forms for articles of incorporation.
You will need to hold an initial organizational meeting. Here, you elect an initial board of directors. Among other things, the board sets policy and strategy, ensures that the corporation follows applicable laws and regulations and chooses officers. A corporation typically has a president, vice-president, secretary and treasurer. Depending on your jurisdiction, a single person can hold multiple or all of these offices. The officers have responsibility for the day-to-day operations of the business.
Bylaws guide how you govern the corporation. The subjects cover when, where and how your directors and shareholders meet, the number of directors, how long directors serve, the filling of vacancies and the rights of shareholders. Your bylaws also define how many directors or shareholders must be present to have a quorum.
Shareholders own the corporation and generally have rights to elect directors and decide on many fundamental matters affecting the corporation. By default, a shareholder can transfer his or her ownership interest to another, and the new shareholders obtain control rights. A shareholder agreement can address concerns that new shareholders will dilute your control. In such a contract, the shareholders may restrict the transfer of shares or require a departing shareholder to sell back to the corporation. With a shareholder agreement, the shareholders may decide how to vote on matters.
You should also purchase a corporate book to keep the articles, bylaws, minutes of directors and shareholder meetings and the stock certificates. Issuing and having paper stock affords evidence of who owns the shares and the number. When you issue stock, you show that you are observing corporate formalities. To enjoy protection from personal liability for business debts that corporate existence affords, you need to demonstrate that the corporation is separate from you.
To that end, you also need to open a separate bank account for the corporation. Commingling business and personal funds can lead to a creditor arguing that your corporate existence is simply a veil and that your personal assets should answer for corporate debts.
As a corporation, the Internal Revenue Service requires that you have an Employment Identification Number (EIN). You can apply online for one. Another tax issue involves your election to be treated as a “small business” corporation (or “Subchapter S”). If you meet the limits for shareholders and other requirements, you can choose this status and avoid the double taxation of profits. In the absence of an S-Corporation status, your profits get taxed both at the corporate level and at the shareholder level when distributed as dividends.
Consult an attorney and a tax professional in making the important decisions on incorporating your business. These decisions about your structure can save you significantly in taxes and in avoiding personal liability.