Process of Incorporation: Everything You Need to Know
The process of incorporation makes it comfortable for you to form a company or Limited Liability Company (LLC) all over the nation. 6 min read
2. Legal Benefits
3. Incorporation Doctrine
The process of incorporation is the process you must follow when incorporating your business, whether it be a corporation, limited liability company (“LLC”), or any other type of entity. Incorporating means that you are forming a new business, which has the same rights and responsibilities as an individual.
Steps for Incorporation
Incorporation is beneficial for many types of businesses and non-profit organizations. If you decide to go this route, follow this process:
- File the Articles of Incorporation. This document is drafted and filed with the Secretary of State. It will detail all important items of your company. You can easily find a template online. However, if you choose to draft this document from scratch, you will want to think about what items should be included in this document. At minimum, you should include the name of your corporation, its purpose, the principal place of business, and whether you will be issuing stock, how many shares, and their value. The fee to file this document ranges from $25 to $1,000 depending on the state in which you choose to incorporate.
- Choose a name. Be sure to conduct research on what you should name your business before incorporating. Remember that there are requirements to adhere to in every state when naming your business, which include finding a business name that is available for use, using certain terms or not using certain terms, and ensuring that you have the correct business name endings, which would be Inc., Corp, or LLC. Most corporation names have three elements: the distinctive name, which sets it apart from other business; the descriptive name, which tells customers what the business does; and the legal ending which is governed by state law. For example, if the name of your business is Wizard Electronics LLC, Wizard is distinctive, Electronics is descriptive, and LLC is the legal ending.
- File the Operating Agreement. While some states do not require this, it may be a good idea to draft one. The operating agreement will essentially outline every aspect of your business from top to bottom. If you want to hire managers to help you oversee the operations, then you will need to indicate as such in this document. If you have a goal in mind for your business's future, then this should be laid out in the document. Another important thing to keep in mind is what type of business you want to incorporate. Do you want an LLC? Corporation? S-Corp or C-Corp? General Partnerships? Limited Liability Partnership? There are advantages and drawbacks to each, so you want to keep this in mind, especially when looking at tax implications for forming a certain kind of business.
- File corporate bylaws. In some states, bylaws are required for new corporations. This document governs administrative details such as voting procedures, notification methods, and annual shareholder meetings.
- Appoint directors. While this is not mandatory, many business owners choose to appoint directors or managers to help operate the business. Having directors can help you with your goals. For example, if you are a two-man partnership, directors can assist if any complications arise in the operations of the business. Due to a differing of opinions, having directors to assist in these issues can help. While managers are responsible for day-to-day administration, directors are responsible for major decisions, like deciding to sell stock. The owners of the company can act as directors, but they are not required to do so. Some states have rules about the numbers of managers and directors a business entity can have.
- Appoint a registered agent. Most states make this a requirement. The registered agent will be in charge of service of process, which means that he or she will be the contact person for service of process if a legal suit arises.
- Obtain an FEIN. You'll want to obtain a Federal Employment Identification Number, free of charge. This number will be your unique identifying number for your business. This number is also required to open and maintain a business bank account and/or business credit card.
- Open business accounts. You want to make sure that you keep your business expenses and revenues separate from your personal assets, especially if you come into a problem where you incur liability. Opening a business bank account will also help you differentiate and establishing your accounting setup, which is the next step.
- Accounting setup. You'll want to make sure that your books and records are consistent. When you incorporate your business, you'll need to abide by local, state, and federal laws, which can include fees, reports, filings, business licenses, and permits. To keep everything organized, you want to make sure that your accounting method is laid out well. This may mean that you should hire an accountant or purchase an accounting system.
- Hire employees. If you plan to hire employees after you've incorporated your business, you'll need to meet additional requirements. You will need to purchase unemployment insurance, as well as workers compensation. You will also have additional books and records due to the fact that you will be responsible for payroll.
- Establish a Shareholder Agreement. If you plan to issue stock shares, you need to develop a document that details procedures for selling and transferring stock and other administrative processes.
- Hold your first board meeting. At this initial directors' meeting, the board will decide on the fiscal year for the corporation, appoint officers, write and adopt bylaws, authorize and issue stock, and create an official stock certificate and corporate seal. If you plan to be treated as an S corporation for tax purposes, directors should vote on this election.
- Issue stock. You cannot open for business until stock shares have been issued and divided among owners. Large corporations must also register their stock offerings with state securities agencies and the Securities Exchange Commission. Small corporations typically issue stock to fewer than 35 individuals, which means they are exempt from registering with the SEC. Private offerings are also usually exempt. Many states have adopted their own SEC exemption rules as well. When you issue shares, keep careful records that indicate the identities of the initial stockholders, how many shares each person has purchased, and how he or she has funded the purchase. Each shareholder will receive a stock certificate. In some states, you may need to submit a notice of stock transaction.
One of the most significant benefits in incorporating your business is the fact that LLC owners are not personally liable for the debts and obligations of the LLC. However, sole proprietorships and general partnerships, as well as corporations, can be held personally liable for such debts. Therefore, if a shareholder acquired $100 in stock, he or she is only responsible to the company for $100 of that stock.
Other benefits include the following:
- Tax flexibility and other tax-related benefits. For example, corporations are taxed at a lower rate than the individual rate and own shares in other corporations. Only 20 percent of the dividends from these holdings are taxable. Corporations can carry an unlimited amount of losses into future tax years to offset their taxable income, while sole proprietors can only carry forward $3,000 in losses.
- Deductibles for business expenses
- Brand protection
- Added credibility
- Easier to obtain financing if incorporated
- Increased customer base as clients want to know that they can trust the business. Therefore, if the business is incorporated, there is an added level of credibility, which in turn, can increase your client base.
- Structure flexibility
- Unlimited growth
- Investment opportunities
- The ability to have a separate credit rating and build a separate credit history
You'll also want to determine where you should incorporate. States like Delaware, California, Nevada, Maryland, Pennsylvania, and Connecticut are favorable states in which to incorporate. While most people incorporate their business in the state they live and conduct most of their business, some business owners have found it beneficial to incorporate in any one of the aforementioned states.
Corporations and LLCs can own property, thereby increasing their assets and revenue by holding such an asset. But if either type of business incurs debt, that property could be affected. Now let's assume you own a corporation. You have your own personal property – your home. If the corporation incurs debt, your own personal property could in fact be affected. However, if you are an LLC owner, your personal assets cannot be affected. Therefore, any debts or obligations that arise out of the operations of an LLC cannot reach the LLC owner.
This document is a doctrine that sets forth certain provisions detailed in the Bill of Rights, which are made applicable to the states through the Due Process Clause of the Fourteenth Amendment. This basically details that the state is held to certain requirements that are also established in the Bill of Rights. This includes the following:
- First Amendment – Freedom of Speech, Press, Religion, and Petition. This amendment is fully incorporated.
- Second Amendment – Right to keep and bear arms. This amendment is fully incorporated.
- Third Amendment – Conditions for quarters of soldiers. Not incorporated.
- Fourth Amendment – Freedom from unreasonable search and seizure. This amendment is fully incorporated.
- Fifth Amendment – Provisions concerning prosecution. Partially incorporated.
- Sixth Amendment – Right to a speedy trial. Partially incorporated.
- Seventh Amendment – Excessive bail, cruel and unusual punishment. Not incorporated.
- Eighth Amendment – Excessive bail shall not be required. Partially incorporated.
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