Incorporation Steps
There are multiple legal entities that can be considered
when starting a small
business. A few are LLC, S Corps, Sole Proprietorships,
Partnerships, and C Corporations. Each type of business
entity has it’s own advantages and disadvantages.
Both from a legal
and a tax perspective. Before choosing an entity, make sure
that you contact a trusted tax advisor or lawyer , explain
what your business is doing and what the goals are. Then
get expert advise in setting up the entity.
Sometimes a lawyer is required to do this, but in many
instances, you can setup your own company and save significant
money. There are also software
packages that can help as well as step by step guides
online. Incorporation is a tricky thing and the appropriate
steps must be followed carefully.
Forming a new corporation requires some careful planning
and a number of key steps. Here is a list of some of the
most important issues to address.
- Choose a corporate company name: This is not easy
because many names are already taken and some names
have trademark issues associated with them. Check out
if the name is available from the Secretary of State
of your state. This can often be done online and does
not require that you call. You will also want to do
a trademark search online to make sure someone is not
already using the name you selected.
- Decide in what state to incorporate: Each state does
have different tax laws. Delaware and Nevada are well
know for corporation-friendly state laws, but most people
simply incorporate in the state in which they live and
plan to base the company.
- Prepare incorporation documents: This will usually
mean preparing the Certificate of Incorporation, the Bylaws,
the Resolutions of the Board of Directors, the Stockholder
Resolutions, the Stock Ledger, Stock Certificates, and
more. There are many
software packages that can help you with these as
well as resources online. Many people use an attorney
simply because this can be intimidating.
- File the Certificate of Incorporation with the State.
Filing of the Certificate of Incorporation (sometimes
called the Articles of Incorporation) is required and
the trigger to starting your company.
- Determine the right capitalization for the corporation:
You want to make sure that you have adequately capitalized
the company to ensure its success. Consider the capital
needs of the company through a well thought out business
plan and financial projections. Capital is the amount
of funds and resources put into your company to get
it started.
- Issue stock to the shareholders and comply with securities
laws: When you sell stock to shareholders, you have
to comply with state and federal securities laws. A
good corporate lawyer can help you navigate through
the stock issuance process.
- If you have more than one shareholder, think about
whether you should have a Shareholder Agreement or Buy-Sell
Agreement: These types of agreements provide what the
shareholders are required to do for the business and
for rights of first refusal on transfer of their shares.
- Make sure you have a Corporate Minute Book: Various
corporate actions require proper documentation, such
as minutes or consents of the Board of Directors and
shareholders. You should set up a Corporate Minute Book
and keep the records in that book.
- Elect the Officers and Directors of the Corporation:
Depending on your state law, you may need more than
one director. Typically, one person can hold multiple
officer positions, such as CEO and CFO.
- Obtain your state and Federal Tax ID number: You will
need these IDs for your business.
You can get the federal form by going to the IRS Web site.
- Determine if you need any special licenses for your
business: State, federal or local rules may require
your business to get a special business license or permit.
- Set up a corporate bank account: You need to treat
your corporation as a separate entity with its own bank
accounts and records.
- If you are going to hire employees, make sure that
you have all the proper forms and agreements for them:
These forms might include an employee "at will"
employment letter (saying either the employer or the
employee can terminate the relationship at any time),
a Confidentiality and Invention Assignment Agreement
(ensuring that whatever they develop in connection with
their job is owned by the corporation), and an Employment
Application (requiring the employee to give you relevant
information as a condition to hiring them). Samples
of these forms can be found at AllBusiness.com.
- Decide if you should elect to be an S corporation:
S corporations have certain tax advantages, but you
have to follow certain rules and file an election with
the IRS.
Of course, your particular business may require additional
steps to be followed, and consultation with your lawyer
and accountant
may be appropriate. For additional information, check out
the detailed "Checklist for Formation of a Corporation."
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