Process of Incorporation: Everything You Need to Know

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 kind of business.

The Process

You could form any kind of business, whether it be a commercial business, nonprofit organization, sports club, restaurant, etc. Incorporating your business can be beneficial for you in many ways. But first, let’s go over the process for incorporating.

[1] File the Articles of Incorporation. This document is drafted and filed with the state’s 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. The fee to file this document ranges from $25 to $1,000 depending on the state in which you choose to incorporate.

[2] Choose a Name. Be sure to conduct some research on what you should first 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.

[3] 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 advantage and drawbacks to each and every one, so you want to keep this in mind, especially when looking at tax penalties for forming a certain kind of business.

[4] Appoint directors. While this is not mandatory, a lot of business owners choose to appoint directors, also referred to as managers, to help operate the business. Having directors can you help with your goals.  For example, if you are a two-man partnership, hiring 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.

[5] 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.

[6] 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 in order to open and maintain a business bank account and/or business credit card.

[7] Open business accounts. Now you’ll want to open a business bank account and a business credit card. 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.

[8] 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 several local, state, and federal laws, which can include fees, reports, filings, business licenses, and permits. In order 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 to assist you, or you can purchase an accounting system to help you.

[9] Figure out if you want to hire employees. This is important. Do you want to hire employees after you’ve incorporated your business? If you do, there are 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.

Legal Benefits

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
  • 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

You’ll also want to determine where you should incorporate. State like Delaware, California, Nevada, Maryland, Pennsylvania, and Connecticut are favorable states to incorporate in. 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. 

Incorporation Doctrine

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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