By Seth Heyman
Every company – from Apple to Zappos – started with an idea and a dream. Then, armed with ambition, ingenuity and a strong work ethic, their founders worked like crazy to transform their many hours of planning, research and strategy into an actual business.
If you’re reading this article, you’re probably an entrepreneur somewhere in the same process. One critical part of your planning when you’re finally ready to launch your business? Incorporating or forming an LLC.
There are many benefits to incorporating. Protecting yourself from personal liability – preventing others from “piercing the corporate veil” – is certainly one. Tax advantages are another. Incorporating also helps to crystallize your expectations and responsibilities. And when it comes time for you to take in outside investment, a corporation is usually the vehicle of choice.
8 Key Steps Before Starting to Operate
But after you form your corporation or LLC, you still have some work to do before you can open your doors. A few key steps:
Before launching your business you must incorporate or form an LLC.
1. Appoint Directors and Officers
Directors and officers are the individuals authorized to conduct business on the corporation’s behalf, and they must be appointed before anything else can be done.
Understanding corporate structure and the roles of stockholders, officers and directors is a crucial aspect to doing business as a corporation. Every position in the corporate hierarchy is different and usually corresponds with specific corporate tasks and responsibilities.
- Stockholders are at the top of the hierarchy. As the owners of the corporation, they’re responsible for establishing basic corporate policy and direction, and for appointing directors (who are usually stockholders themselves).
- In turn, directors are responsible for implementing the policies of the corporation as determined by the shareholders. They elect officers of the corporation. Once directors are chosen, you’ll need to prepare written resolutions appointing the officers, and authorizing them to open a corporate bank account.
- The corporation’s officers run the day-to-day operations of the company. For example, they’re responsible for ensuring that the company conducts its business properly and in accordance with the vision of the Board. Top-level officers, such as the President and CEO, have the power to execute contracts on behalf of the company, and must answer to the Board for any errors they make.
You’ll need file-stamped Articles of Incorporation, director resolutions appointing the officers and your EIN confirmation letter.
Directors and officers must be appointed before you can conduct business.
2. Prepare Bylaws
All corporations must have bylaws that set forth the rules under which the corporation will operate. Bylaws are created and adopted by the Board of Directors and describe the roles and responsibilities of the corporation’s officers, directors and shareholders. They also set forth the meeting requirements, the matters that may require consent, the nature of the majority required, notice requirements, limitations on expenditures and a host of other matters.
If your company is going to have just one officer, director and shareholder, you can find bylaw forms on the Internet, including this free bylaw legal document for California, this one for New York and this one for Delaware. If there are multiple parties involved, or outside investment is contemplated, your bylaws should be prepared or reviewed by a competent attorney.
3. Obtain a Tax ID number
4. Open a Corporate Bank Account
Your corporation or LLC is a legal entity entirely separate from its shareholders, directors and officers. As a result, it needs its own bank account so that its finances can be maintained separately. To open an account, the bank will need your file-stamped Articles of Incorporation, director resolutions appointing the officers and your EIN confirmation letter.
All corporations must have bylaws that set forth the rules under which the corporation will operate.
If you’ve incorporated in another state, you’ll need to obtain official permission to transact business in your state from the Secretary of State. Many banks require you to bring proof that you’ve done this.
Yes, it seems obvious, but after you have a corporate account, keep in mind that it isn’t yours! The account, along with the funds in it, belong to the corporation. If you’re the sole corporate officer, director and shareholder, never withdraw cash or use the company debit card for your personal needs.
Just as you’re separate from the company, your money is separate from the company’s money. Failing to do this makes it easier for someone to pierce the corporate veil – and create liability problems for you.
5. Set Up a Corporate Records Book
It may seem like a minor detail, but maintaining corporate records is one of the more important aspects of preserving the corporate veil.
Your records book doesn’t need to be a fancy, leather-bound volume; it can be an ordinary looseleaf binder. Keep your Articles of Incorporation, corporate resolutions, minutes, shareholder roster and share certificates in the book, along with any other important records.
6. Obtain Required Licenses
The Small Business Administration offers a useful guide to the type of licenses and permits you may need at the state level. As for municipal permits, visit the official website of your town or city.
Make sure a contract doesn’t prohibit assignment before transferring it to your corporation.
7. Get Insurance
In addition to workmen’s compensation and general liability insurance, determine whether your business involves a risk of personal or financial injury to third parties and obtain insurance to protect against those risks.
At a bare minimum, you should have general liability and Errors and Omissions (E&O) insurance, but you might want to consider Directors and Officers (D&O) insurance as well. Some courts have ruled that a failure to insure against obvious risks justifies piercing the corporate veil, so don’t overlook this step!
8. Transfer Existing Contracts
If you’ve already started business as a sole proprietor, you’ll need to transfer any contracts in effect between you and your customers, vendors and other parties to the name of the corporation.
It’s always a good idea to get the other party’s consent to the transfer, but unless the contract expressly prohibits an assignment, you can transfer it to your corporation without obtaining the consent of the other party. But keep in mind that you’re still on the hook for any personal guarantees.
2 Key Steps After You Start Doing Business
After you start doing business, there are several other legal matters that you must do in order to maintain the corporate shield:
Maintaining corporate records is one of the more important aspects of preserving the corporate veil.
1. Observe Corporate Formalities
To protect the legal status of your corporation, it’s imperative to maintain complete and accurate documentation and follow corporate formalities.
Document your corporation’s major activities in the form of corporate resolutions, amendments, notes and meeting minutes. Assemble these forms within the corporate record book to validate the appropriateness, authenticity and authorization of the business you’ve conducted.
2. Hold Annual Meetings
The laws of every state require that a corporation conduct annual stockholder and director meetings to discuss the company’s status and vote on certain matters that require a vote, such as electing directors.
The annual shareholder meeting usually involves a review of the past year’s business and finances, along with plans for the upcoming year; typically, it also includes a vote for the next year’s board of directors. The annual Board of Directors meeting generally involves a review of the past year, special reports by directors, and, if the bylaws require it, a vote for the next year’s officers.
It’s imperative to that you document your corporation’s
Your corporate secretary must keep written minutes, and these minutes should be certified by the secretary as accurate and placed in your corporate minute book.
3. Hold Special Meetings
A pressing matter sometimes requires approval from directors or shareholders that can’t wait until the annual meeting. (For example, the corporation may need to increase the amount of its authorized shares in order to complete a deal with an outside investor.) You can obtain consent in one of two ways:
- Hold a special meeting. As with annual meetings, special meetings also require advance notice, but the notice period is usually shorter. These meetings only address the issue that requires discussion.
- Obtain consent via a written resolution. (This is far easier to do if your company doesn’t have many directors or shareholders.)