Starting a business can seem overwhelming. In reality it is not as hard as it seems with the help of an incorporation service company like Inc Plan (USA). Simple and complex businesses with many partners, aggressive goals, and intricate structuring usually require professional assistance to prevent a costly mistake. Below is a detailed overview of the incorporation process to help business owners understand the process of incorporating a small business.
1. Pre-Considerations to Filing
The complexity of the incorporation process can sometimes exceed a business owner’s personal knowledge of the law or information available online. Assistance might be necessary for business owners planning to take advantage of interstate tax structuring, elaborate operating agreements, or specialized tax incentives. All 50 states do not require an attorney to incorporate, but business owners should ensure that all potential legal consequences are fully understood before filing or signing the Articles of Incorporation.
2. Select a State and City
Small businesses that operate in a single city should usually incorporate in the same state where they conduct business. “Brick and mortar” operations will have no income tax advantages to incorporating in another state because taxes are allocated to individual states on the basis of where income is earned. Onlines businesses or businesses selling intellectual property should consider incorporating in a low tax state like Delaware. The primary consideration for local businesses is usually the municipality where the incorporated business will be officially headquartered. Residential municipalities often have high corporate taxes, with rates as high as 15 percent, to deter large corporations from setting up unsightly warehouses or factories. Local businesses can sometimes receive a waiver, but the acceptance of a waiver application is often required before incorporating. All jurisdictional liabilities and arrangements must be investigated before filing with the state.
3. Pick Corporation Directors
State corporation laws differentiate between directors, officers, and shareholders. Officers are appointed by directors, who are elected by shareholders. Corporations do not automatically provide day-to-day decision-making rights to major shareholders unless they are designated as a director. However, shareholders are given the right to vote for directors, and shareholders can vote for themselves. There are no laws about the maximum number of directors that a corporation can appoint, but private corporations must retain at least one director. Corporations can outline the rights that directors have in their Corporate Bylaws. Members planning to take an active role in signing, hiring, or controlling accounts should be designated as a director. New corporations should file paperwork to appoint directors at the same time that the Articles of Incorporation are submitted.
4. Set the Rules for Stock Ownership
All corporations are required to have stock shares, which provide legal rights to shareholders based on terms outlined in organizing documents. Corporations can have multiple classes of stock. “Preferred stock” and “common stock” are used by most corporations, but companies can outline customized variants in the Articles of Incorporation. Some states also require corporations to set a par value for their stock, which sets a minimum sale price for each share. The par value is important because it allows certain states, such as Delaware, to assess franchise taxes based on the total par value of all outstanding shares. Most states have implied stock rules that go into effect when contractual terms are not explicitly mentioned. All states minimally require the Articles of Incorporation to describe the maximum number of shares, the par value of a share, and the rights given to each class of stock.
5. File Articles of Incorporation
The Articles of Incorporation can be drafted after all of the strategic considerations have been investigated and discussed among shareholders. The language chosen for the Articles of Incorporation should be both professional and concise. Business owners may need legal assistance for simple or elaborate structuring or customized language. Timing is important when submitting Articles of Incorporation because modifications initiated after the day of filing often trigger a wait period that could bar additional changes for several years.
6. Issue Stock Certificates
Most states have no legal requirement for stock certificates if explicit language is used in the Articles of Incorporation that mentions that stock certificates are not needed. However, a Notice of Shareholder Ownership is required in the absence of an official certificate. A notice is a simple document provided to each shareholder that verifies ownership, stock type, and the total number of shares. In contrast, stock certificates are elaborate paper documents that include an official seal and identification number. The Notice of Shareholder Ownership is more advantageous for most businesses because it keeps costs down, but institutional investors might request formal stock certificates.
7. Draft Corporate Bylaws
Corporate Bylaws supplement the Articles of Incorporation and provide more detailed rules to regulate daily operations. Bylaws determine a corporation’s fiscal year, appoint officers, and determine the time and place of board meetings. The daily responsibilities of officers and directors are also outlined in the Corporate Bylaws, in addition to rules that govern ordinary employees. Judicial procedures should also be outlined in the Corporate Bylaws to ensure fair compliance with the prescribed terms. Bylaws are legally enforceable documents, but directors have more flexibility to shape the terms than with Articles of Incorporation. Corporate Bylaws can also be readily changed with the consent of more than half of the directors. Some states require Corporate Bylaws to be submitted to the Secretary of State’s office while others do not even require businesses to draft Bylaws.
8. Appoint Officers and Structure Authority
Officers can be appointed after the Articles of Incorporation have been submitted to the Secretary of State and have been approved. The Corporate Bylaws should guide the appointment of officers, but new corporations should feel free to modify the terms of officer appointment guidelines to meet the dynamic needs of the real business environment. Many directors appoint themselves as officers in small corporations. Officers should be given an individualized title, such as Chief Executive Officer or President, though this is not legally required. There are no legal rules governing officer titles, so businesses can prescribe titles that fit their specific needs. An organization chart that includes all officers should be included in the Corporate Bylaws to ensure adherence to decision-making authority.
9. Obtain New Legal Documents
Compliance with an abundance of regulatory requirements is often necessary for new corporations. However, specific requirements can be difficult to generalize because of significant regulatory variation between industries. All new corporations should at least obtain an Employer Identification Number (EIN) from the IRS. Any former documents that utilized a pre-incorporation EIN must be modified, which can be a laborious process. Professional service businesses, such as landscaping services or hospitals, may need to demonstrate proof of a license before initiating operations. Some jurisdictions escalate the licensing or permit requirements for corporate entities, utilizing rules that pass-through entities are not subject to. Therefore, local and state laws must be evaluated to ensure that a new corporation is complying with laws in accordance with corporate status.
Initiating the Incorporation Process
Careful planning is the most important factor to ensure that the incorporation process does not create preventable legal problems. Inc Plan (USA) can help business owners stay in compliance with laws and complete the incorporation process with minimal expense. Complex corporate planning requires the assistance of a professional to account for unforeseen consequences. Business owners considering incorporation should start by assessing their own needs to determine what is needed to complete the incorporation process. Inc Plan (USA) can help you better understand the process with a free 30 minute consultation.