Business Organizations Law
Forming a Corporation
A corporation is a legal entity with a corporate charter from a state. To form a corporation, the following simple steps are required:
1. Select a name for your business. State laws restrict certain words or phrases that can be used in your business name - so make sure you check your state’s rules, which are typically available on the Secretary of State website.
2. Prepare and file the required paperwork with the Secretary of State in the state of incorporation. Typically, Articles of Incorporation must be filed, but in some states the wording is slightly different.
3. Pay the required filing fees.
4. Establish the corporate governance by choosing a board of directors and adopt corporate bylaws.
5. Hold the first meeting of the board of directors and authorize the directors and officers to conduct business. Typically, the first orders of business include issuing stock to the owners, setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.
As time goes on, it is important the board of directors, and officers, conduct business in accordance with corporate governance requirements. Meetings must be held at least annually, and usually more regularly, to document that the corporation is conducting business in accordance with state laws.
To form a limited liability company, the following simple steps are required:
1. Select a name in accordance with the state’s rules regarding limited liability company names. Certain words may be restricted from being used in an LLC name per your state’s laws.
2. Prepare and file the required paperwork with the Secretary of State in the state where the LLC is to be formed. Typically, Articles of Organization must be filed, but in some states the wording is slightly different. In some states, additional paperwork may need to be filed.
3. Pay the required filing fee.
4. Prepare an LLC Operating Agreement. This is the document that sets forth the rights and responsibilities of the LLC members. LLC’s can be “member-managed” or “manager-managed,” which is typically set forth in the Operating Agreement.
5. Hold the first meeting of the members to authorize the members (or a manager, if the LLC is manager-managed) to take actions necessary to start-up the business. Typically, the first orders of business include setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.
As time goes on, it is important that the LLC conduct business in accordance with the Operating Agreement and state law requirements. Meetings should be held and important business documented. While an LLC does not typically need to follow as many formalities as a corporation, it is important that the members/managers conduct business with sufficient formality so as not to jeopardize the integrity of the entity’s limited liability status.
There are several different types of corporations from which business owners can choose when they initially set up their business. One type of corporation is an S corporation. The “S” in “S Corporation” refers to Chapter 1, Subchapter S of the United States Internal Revenue Code. Owners who choose to incorporate an S Corporation are choosing not to have the Corporation pay income taxes but rather to have each shareholder pay personal income tax (or report a loss) on the shareholder’s proportionate share of income (or loss) from the S Corporation.
In order to elect to incorporate as an S corporation, the company must have only one class of stock and not more than a certain number of shareholders. Since all of the shareholders are responsible to the IRS and state revenue department for their proportionate share of the corporation’s profits or losses, all of the shareholders must be US citizens or residents and must be people and not other legal entities (such as other corporations, LLC or LLPs.)
A C corporation is the most common type of corporation. The “C” refers to the subchapter of the Internal Revenue Code which explains the rules of taxation for this type of business structure. C corporations may have any number of investors and it can, therefore, be easier to raise the capital necessary to operate the business.
Since the number of investors is not limited, C corporations can offer stock incentives to their employees. Corporate owners usually do not have personal liability for corporate debts or negligence. Some businesses also find that it is less expensive to provide health insurance and retirement benefits for employees if their business is properly incorporated as a C corporation.