How to Incorporate a Business
As you plan how your business will grow, there are a number of business structures to consider. If you decide on incorporation, you will need to be familiar with how to incorporate a business. While the process can be detailed and state-specific, this article outlines the general steps and considerations for incorporation.
Choosing a Name for Your Corporation
When you go about choosing a name for your corporation, you should be aware of the rules that your state follows when it comes to corporate names. Contact your state's office that deals with corporations to find out these rules if you are not already familiar with them. However, the following rules are found in many states:
- The name of your corporation cannot be the same as any other corporation that is on file.
- The name must end with some designation that shows the corporate status of your business, such as "Corporation," "Incorporated," or "Limited." In addition, many states allow abbreviations of these words (such as Corp., Inc., or Ltd.).
- The name cannot include any words that imply an association with the federal government or restricted types of businesses. Such restricted words include "Bank," "Cooperative," "Federal," "National," "United States," or "Reserve."
Another factor to keep in mind when choosing a name for your corporation is that you do not want to violate any other person's or company's trademarks.
Generally, you can submit a proposed name to your state's corporation office to see if the name would be an appropriate and allowable one. In addition, if you find a name you like and that passes muster, you can often pay a small fee to have the name placed on hold for a short period of time during which you can file your incorporation papers.
Once you have decided on a name that works and is available, you do not need to register the name of your business with the state. This is generally done automatically when you file your articles of incorporation.
However, keep in mind that if you plan on operating your business under a name that is not the name of your corporation, you must file a "fictitious" or "assumed" name statement with the state or county in which your business is headquartered.
Directors are generally responsible for making major financial and policy decisions for the corporation, such as authorizing the sale of stock for the corporation. These people are generally picked out and appointed by the initial owners of the corporation before the corporation opens its doors for business. Although many owners simply appoint themselves as directors of the company, there is nothing that requires directors to be owners of the corporation.
A majority of states allow a corporation to have one director no matter how many owners there are of the corporation. However, there are other states that require the number of directors to equal or exceed the number of owners. For example, if a corporation in such a state had three owners, then the corporation must have three or more directors.
Filing the Articles of Incorporation
Once you have found the right (and legal) name for your corporation and you have chosen the people that will be the directors, you will have to prepare and file the articles of incorporation with the appropriate office in your state's government. In most states, you will file these documents with the secretary of state's office. The articles of incorporation are sometimes referred to as the "certificate of incorporation" or a "charter" depending upon the state that you are in.
There are no states that require a corporation to have more than one owner. For corporations that only have one owner, the articles of incorporation are relatively simple. The only person that needs to sign the papers is the sole owner. For corporations that have more than one owner, either all owners must sign the articles, or all the owners must appoint one person to sign on behalf of all of the owners. When this happens, the person that signs the articles on behalf of all the owners is called the "promoter" or the "incorporator."
Many people fear the articles of incorporation because of its impressive sounding name. However, these documents are actually relatively simple. Indeed, in many situations, getting your articles of incorporation prepared is just a matter of filing out a form that is provided by the secretary of state's office. The articles normally just spell out a few bit of basic information about your corporation, like the name, address, and sometimes the names of the directors.
However, most articles of incorporation require that you provide the name and contact information for at least one person. This person will serve as the "registered agent" for the corporation. This is the person that the members of the public will contact if they want to sue the corporation or involve the corporation in an ongoing lawsuit.
Many people that have gone through the steps spelled out above often overlook and miss this very important step. The bylaws of a corporation spell out how the corporation will be run with respect to important decisions and voting rights. Corporate bylaws need to address when and how often shareholder meetings will be held as well as spell out various other important rules. You should consult with either an attorney or at the very least a self-help book, when drafting the bylaws for your corporation. The bylaws will generally be adopted for the corporation at the first meeting of the directors.
Another important document that is often overlooked is a shareholder's agreement. This agreement should be agreed upon by all shareholders and will spell out various issues related to shareholders, such as how ownership will be transferred in the event that a shareholder dies, becomes disabled or wishes to leave the corporation.
The First Meeting of the Board of Directors
After all the above steps have been followed, it is time for the board of directors to hold their first meeting. At this first meeting, a number of corporate formalities must be taken care of, including:
- Setting the corporation's fiscal accounting year,
- Choosing and appointing corporate officers,
- Setting and adopting the corporate bylaws,
- Authorizing and issuing the shares of stock, and
- Settling on the official stock certificate form and adopting the corporate seal.
In addition, if the corporation is to be an S-type corporation, the directors should vote on and approve the election of an S-type corporation.
Issuing Stock and Registering Securities
A corporation should not open its doors for business until the shares of stock have been issued. When shares of stock are issued, the ownership of the corporation is formally divided amongst all the owners. In addition, issuing stock is a requirement that must be met before the corporation can do business.
When you issue stock, you are entering the world of securities laws. Generally speaking, large corporations that issue stock must register all of their stock offerings with the SEC (Securities Exchange Commission) and any state securities agencies. This can take time and cost a bit of money.
Exemptions to Securities Registration (Small Corporations)
Most small corporations that do not make a private offering of stock to more than 35 people may be exempt from having to register their stock offerings with the SEC. In addition, if a corporation only makes a private offering to those who can reasonably be expected to take care of themselves because of their personal financial situation, that private offering may also be exempt from the SEC registration rules. Additionally, many states have adopted exemption rules that mirror or are very similar to the SEC rules. As a general rule, if your corporation will only issue shares of stock to a small number of people that will take an active role in running the business, then that sale will probably be exempt from registration rules.
However, if you plan on selling stock to passive shareholders that is people that will not take an active role in the corporation you should contact a good small business lawyer as it will probably get complicated when you try to comply with both federal and state securities laws.
When your corporation is ready to issue the actual shares, you will have to keep detailed documents of:
- The names of all of the initial shareholders,
- The numbers of shares that each shareholder will buy, and
- How each shareholder is going to pay for his or her shares.
You will then issue the stock certificates to each shareholder that bought into the corporation. You may also have to file a "notice of stock transaction" if your state's laws require it.
Getting Ready for Business Licenses and Permits
If you plan on your corporation entering into a business that requires a license or a permit, be sure to get those soon. For example, you will probably have to obtain a business license before opening for business. In addition, you will most likely need a tax registration certificate for both federal and state taxes. Keep in mind other licenses and permits as well, such as an employer ID from the IRS, a seller's permit, a liquor license (if needed), a zoning permit, etc.
Need Help Incorporating? Contact an Attorney Today
Corporations are the most complex business legal structures to form and typically require some degree of professional legal assistance. Find a business organizations attorney near you to get started.