5 Things You Need to Know Before Incorporating a Business
Here are some pros and cons of forming a corporation, and a list of the most important details you’ll need to get started.
Incorporating establishes a business that is legally separate from its owners. Corporations can do many things that people can do, including acquiring property, signing contracts, having bank accounts, and filing lawsuits.
But if your company is small, you may wonder whether a company is necessary.
The most typical reason to incorporate a business is to limit your liability for business obligations. This can be a good idea if you have lots of outside arrangements.
Also, because a corporation’s ownership is contained in shares that are easy to transfer from one owner to another, a company is a good choice if you’re preparing to sell the business or attract outside investors. And unlike a sole proprietorship or general partnership, a business continues to exist beyond its founders’ lives.
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Nevertheless, it costs money to set up and dissolve a company, and corporations have additional recordkeeping and annual reporting needs that sole proprietorships and associations don’t have. If your business is small and just starting, those extra obligations can outweigh the benefits of incorporating.
Relying on your situation, a corporation may save you money on taxes, or it may cause you to pay more in taxes. An accountant can inform you of the tax effects of incorporating.
If you’ve considered the pros and cons and determined that you want to include them, you’ll need to prepare articles of incorporation and file them with the state. Each state has its own rules about how to include it, but here is some basic knowledge you’ll need:
Regulations about business names vary from state to state, but most have these general guidelines:
- Your company name must be different than the name of any other company entity registered to do business in your state. Most states have an online search tool that allows you to check for similar business names.
- You are restricted from using certain terms in your names, such as vulgar words or the word “bank,” unless you are a monetary institution.
- Your name must end with “Incorporated,” “Company,” “Corporation” or an abbreviation for one of those words.
Your company address is simply the place where your company receives mail. It is usually acceptable to use a P.O. Box as your company address.
Names of Decision-Makers
Your articles of incorporation must list the names of some of your decision-makers. There are two types of decision-makers you might have to identify: incorporators and directors.
In all states, the articles of incorporation must list the terms of one or more additional incorporators. An incorporator is a person responsible for training, signing, and filing the articles of incorporation. Incorporators’ duties typically end once the articles are filed, and a board of directors is chosen.
Some forms also require you to list the corporation’s initial board of directors. The board of directors is responsible for setting corporate goals and procedures and naming officers to conduct the corporation’s day-to-day interactions. In a small business, the board of directors is usually made of up the business’s owners, but directors do not have to own shares in the business. Each state’s laws set a minimum number of leaders—usually one to three.
Names of Business Owners
The owners of a corporation are known as shareholders, and they own shares of stock in the business. In your articles of incorporation, you’ll generally need to specify the number of shares of stock your corporation is authorized to issue. Still, you won’t have to list the terms of the shareholders.
Your inner corporate records should include your shareholders’ names and the number of shares of stock issued to each of them.
Physical Address in Region of Formation
The articles of incorporation must specify a street address within the region, and a person located at that address that can receive legal documents, notices, and lawsuits on behalf of the corporation. The address is sometimes referred to as a registered office, and the person at the address is referred to as a registered agent or statutory agent.
In most regions, your business location can serve as the registered office, and a corporation or anyone aged 18 or over can be the registered agent. However, if you don’t have an office in the state where you incorporate or prefer to have someone else act as an agent for you, you can hire a professional registered agent.
Once you’ve collected this basic information, you’re ready to get started on forming your corporation. In complement to the articles of incorporation, you’ll need bylaws that will guide the way your business operates.
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