Incorporate Business.

Deciding to incorporate your business or form a Limited Liability Company (LLC) is a significant step that offers numerous advantages over operating as a sole proprietorship or partnership. This guide explores the key reasons why entrepreneurs choose to incorporate, clarifies common terms, and answers frequently asked questions about the process of establishing a legal entity for your business.

Why Incorporate Your Business?

Forming a corporation or LLC provides several crucial benefits that can contribute to your business's stability and growth:

Protect Your Personal Assets

One of the most compelling reasons to form a corporation or LLC is to safeguard your personal assets. Without a distinct legal entity for your business, you face unlimited personal liability for business debts. This means that if your business encounters severe financial difficulties, creditors could potentially claim your personal property, such as your home, retirement savings, or other assets you or your spouse own. Establishing a corporation or LLC creates a legal separation, offering a layer of protection for your personal wealth.

Potentially Save Money on Taxes

If you operate as a sole proprietor, your entire business profit is subject to self-employment tax. When you set up a corporation for your business, only the salary you pay yourself is typically subject to self-employment tax. For an S-Corporation, the remaining profit may not be subject to self-employment tax, potentially leading to tax savings. Additionally, forming a corporation can allow for certain medical and childcare costs to be deductible, which may not be the case for sole proprietors.

Reduce Your Chance of a Tax Audit

Statistics suggest that businesses operating as sole proprietors (filing Schedule C with their personal tax returns) may face a higher likelihood of being audited by the Internal Revenue Service compared to businesses structured as corporations.

Enhance Professionalism and Credibility

Adding "Inc." or "LLC" after your business name can significantly boost your credibility with customers, partners, and investors. These legal designations signal professionalism, trust, and a serious commitment to your business, which can be a valuable asset in the marketplace.

How Long Does the Incorporation Process Take?

The processing times for incorporating a company vary by state and can change frequently depending on the current workload at the state's filing office. It's advisable to check with the specific state agency for current estimates.

What Are Articles of Incorporation?

A corporation's "Articles of Incorporation" is the foundational document filed with the state that officially establishes the corporation's legal existence. Once filed, the corporation is formally recognized under state law.

The complexity of Articles of Incorporation can range from very simple to highly detailed. Most jurisdictions generally require, at a minimum, information about the corporate name, the registered agent, and the corporation's business address. Specific requirements can vary significantly from state to state.

What Are Corporate Bylaws?

Bylaws serve as the internal operating document for a corporation. They typically outline the responsibilities, rights, and duties of directors, shareholders, and officers. While essential for internal governance, most states do not require bylaws to be filed with a state agency.

Understanding Corporate Roles

What is a Corporate Officer?

Corporate officers are individuals appointed to manage the day-to-day operations of the corporation. While most jurisdictions allow the same person to hold multiple officer positions, each role carries distinct responsibilities. Common officer positions include:

For example, the President is typically responsible for entering into contracts on behalf of the corporation, the Treasurer manages and accounts for corporate funds, and the Secretary is responsible for observing corporate formalities and maintaining corporate records. The specific authority and responsibilities of each officer are usually detailed in the corporate bylaws and may be further defined by employment contracts or job descriptions.

What is a Corporate Director?

The Board of Directors functions as the primary management body for the corporation. Their responsibilities include establishing business policies, approving major contracts, and overseeing significant undertakings. The Board may also elect the President. The day-to-day business practices are carried out by the officers and employees under the guidance and supervision of the Directors.

Directors must act collectively, meaning their votes and decisions are valid only when made at a Board of Directors meeting. These meetings require certain formalities, such as proper notification to all directors. For a meeting to be valid, a quorum of directors must be present, which is typically a majority of the serving directors, though bylaws can specify a different minimum.

The Board of Directors should meet regularly (e.g., monthly or quarterly), and at least annually. Special meetings can be called for urgent matters. The first meeting of the Board of Directors is crucial for adopting bylaws, the corporate seal, stock certificates, and record books.

Like officers, board members have a fiduciary duty to act in the best interests of the corporation, prioritizing the corporation's welfare over their own. They must act prudently and avoid negligent management. It is vital for the board to properly document all actions, ensuring that each decision is reasonable, lawful, and beneficial to the corporation. Corporate minutes should detail the arguments and statements supporting board actions.

What is a Federal Employer Identification Number (EIN)?

If you plan to open a bank account under your corporate name, most banks will require your corporation to have a Federal Employer Identification Number (EIN). Also known as a "Federal Tax ID Number," an EIN is a unique nine-digit number assigned to a corporation or LLC by the federal government for taxation purposes. It functions similarly to a Social Security Number for an individual.

Most banks require an EIN as a prerequisite for opening a business bank account, regardless of whether the company will have employees. You can apply for an EIN directly with the IRS or through various business formation services.

Does a Corporation Have to Issue Stock?

Yes, shares of stock represent ownership in the corporation. If no shares are issued, no individual formally owns the corporation. Therefore, shares must be issued to the individuals or entities that will own the corporation.

While many states offer exceptions and exemptions from registering stock issuances with state or federal agencies for most small businesses, it's wise to consult with a licensed attorney or the appropriate regulatory entity to determine if you must file a notice of stock issuance at the state or federal level.

What is Par Value for Stock?

A business corporation must sell shares of stock to capitalize itself, providing the corporation with its own distinct capital, separate from the owners' personal funds. This separation helps support the shielding of shareholders from personal liability for corporate debts and obligations.

"Par value" is a nominal dollar value assigned to shares of stock, representing the minimum amount for which each share may be sold. There is no required minimum or maximum par value; shares can even have "no par value," in which case the Board of Directors assigns a value below which shares cannot be issued. While there's no minimum number of shares that must be authorized, a corporation cannot sell more shares than it is authorized to issue and must receive consideration (payment) in exchange for its shares.

What is a 'Doing Business As' (DBA) Name?

Individuals and unincorporated entities that regularly conduct business using a name different from their legal name must file an assumed name certificate, often referred to as a "d.b.a." (doing business as), with the county clerk in each county where business premises are maintained.

Corporations, Limited Liability Companies (LLCs), or Limited Partnerships (entities created by filing with the secretary of state) that operate under a name different from the one stated in their organizational documents must also file assumed name certificates. These filings are typically made in the county or counties where the registered office and principal office are located, and often also with the secretary of state.

Will Incorporating Prevent Others From Using Your Company Name?

Incorporating your business does not automatically prevent other businesses from using a similar name. Generally, each business is responsible for protecting its own business name and the goodwill it has developed from the sale of its goods or services within a specific geographic area. Filing Articles of Incorporation primarily prevents the secretary of state from registering another corporation, LLC, or limited partnership with a name that is identical, deceptively similar, or too similar to your existing entity's name within that state.

How Can You Protect a Trade Name Nationwide?

There is no single national registration for trade names. Businesses, including corporations, typically protect their trade names by registering them as a service mark or trademark if the trade name also functions in that capacity. Given the legal complexities involved in protecting intellectual property across state lines, it is highly recommended that businesses seek advice from private legal counsel regarding how to protect a trade name in interstate commerce.

Can One Person Be a Shareholder, Director, and Officer?

While requirements vary by jurisdiction, most states allow a single individual to serve as the sole shareholder, sole director, and hold all required officer positions (typically President and Secretary) in a general, for-profit corporation. A corporation itself cannot be a director of another corporation.

What's the Difference Between a Corporation and an LLC?

Both corporations and Limited Liability Companies (LLCs) are legal entities formed under state law, designed to provide liability protection to their owners. However, they have distinct structures:

Both entities typically incur state franchise taxes, but their federal tax liabilities can differ significantly. Generally, individuals form corporations or LLCs to shield shareholders