Process of Forming a Company: Everything You Need to Know
The process of forming a company depends on the type of company being formed.3 min read
The process of forming a company depends on the type of company being formed. Forming a new company can be broken down into four stages:
- Capital Subscription
- Commencement of Business
What Decisions Have to Be Made to Form a Business?
Before you can establish a company, you will need to make several decisions. For example, you will need to determine:
- The name of the company
- How you want it to be incorporated (LLC, s-corp, c-corp, partnership, sole proprietorship, etc.)
A business can change its legal form at any time. The formation of each business type provides a different legal framework, including how it conducts its activities and its tax liability. When a private company or a public company with no share capital is formed, promotion and incorporation are the only steps that must be taken before starting its operations.
While all new companies have various steps to take during the formation process, a private company is able to commence business immediately after they have received a certificate of incorporation. A company with share capital will go through additional steps before commencing business. Let's take a look at the process of forming a new company.
All companies start with promoters. This is the individual or individuals who take the initial steps necessary to begin the formation process. When an individual or individuals discover a business opportunity and then invest with funds, property, and managerial skills for the purpose of earning income, this would be a promotion.
Another example of promotion would be participating in the startup of an enterprise. It involves all activities that are a part of the startup process. Promotion begins as early as when an individual seriously starts considering the formation of the company, according to H.E. Heagland. In addition, once the business is up and running, promotion comes to an end, Heagland adds. Likewise, Guthmann and Dougall agree that promotion begins at the conception of the idea and carries on until the business is operating.
Of course, an enterprise can't just establish itself; an individual or individuals must bring the enterprise into existence. Therefore, it has to be promoted to exist. If something is to be promoted, it must have a promoter as well. The promoter is the individual who conceives the idea of formation and then takes action to establish the enterprise into existence.
Who Can the Promoters Be?
Promoters can be professional, occasional financial contributors, entrepreneurs, or a variety of other types. When a company incorporates, it becomes its own legal business structure. It is separate from its owner or owners and is an entity to transact business as a separate legal unit. In addition, a corporation has liability protection and can raise capital through sales of shares of the company. Retirement funds and qualified retirement plans are established more easily, as well. States will vary in the requirements for forming a corporation.
After a name has been verified for availability, the promoter would prepare the following documents.
Memorandum of Association
Forming a company places a lot of obligations on a lot of people. All initial shareholders who agree to form the company will sign the memorandum. The memorandum is basically a legal document that sets up the company, including the objectives of the corporation, its name, its address, and the names and addresses of all members.
Articles of Association
The articles of association set out how the company is to be managed, governed and owned.
Copy of Proposed Agreement
If a company chooses to hire a full-time director or manager, an agreement should be entered and then be filed with the Registrar of companies.
Basic Steps to Form a Company
To register your company, you will need to file several important documents. These documents must be filed with the appropriate entities or you will not have a legit business to operate. Instead, you will be operating illegally and this could land you in hot water with the IRS. Once you have filed the proper paperwork with the appropriate entities, you will likely have to pay a fee to become an official business. After you have met all requirements, you will then receive a Certificate of Incorporation.
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