There are seven steps involved to incorporate your business. This article assumes you have already gone through the different types of business structures available and have decided on incorporating. While incorporating can be a do-it-yourself venture, there are situations where security the help of an attorney is advisable.
Choosing a Corporate Name
First, you must check on your state’s corporation rules choose an available business name that falls under the rules. The State Department handles the rules of incorporation so check the website for the State Department where your business will be formed to be sure you are in compliance.
You must first reserve your name by completing a form that is usually found online at your State Department. When you complete the incorporation process, the name will then be registered automatically with the state. If you will sell products or services using a different name, it is required that you file a “fictitious” or “assumed” name statement as well.
Private corporations must be careful to choose names that do not suggest a federal government affiliation or restricted business type. Words like Bank, Cooperative, Federal, National, United States or Reserve should not be used.
After reserving the corporate name, you must choose directors. These are the individuals responsible for making major policy and financial decisions in the corporation. Directors are charged with authorizing stock issuance, appointing corporate officers, setting officer salaries and approving loans both to and from the corporation.
In most cases, the initial owners of the corporation, or shareholders, appoint the directors. The number of directors chosen depends on the state where the business is domiciled. Most allow only one director. Others require one director for each owner of the corporation. Owners often elect themselves as directors.
Articles of Incorporation
The next step for incorporating your business requires that you file “articles of incorporation” with the Secretary of State’s office. Most states use the terms “certificate of incorporation” or “charter” for these papers.
The Articles need not be complicated or overly lengthy. Most can prepare the document in only a few minutes. Most states have a standard form that you can fill out as your articles of incorporation. The document specifies the basic details like the corporate name, principle address and names of directors.
The articles of incorporation require that you provide the name and address of one person, often a director, to act as a “registered agent” or “agent for service of process” for the company. The reason for a registered agent is to give the public a person to contact should there be the need to file a lawsuit or other complaint.
The person who signs the articles of incorporation is called the “incorporator” or “promoter” of the corporation. This can be just one owner of the corporation in most cases. Other times, each owner may choose to sign.
You must also draft corporate “bylaws,” which describe the internal operating rules of your corporation. These rules will spell out where directors and shareholders will meet and what the corporate voting requirements will be. You can often do this yourself but in some cases, you may be more comfortable hiring a lawyer to draft them. In most cases, the bylaws will be voted upon and adopted in the first board meeting.
It is also a good idea to adopt a shareholders’ agreement that will detail how changes in ownership will be handled. This document should explain what would happen when an owner retires, dies, leaves the corporation or becomes unable to fulfill his or her duties.
The Board Meeting
The first board meeting is necessary to take care of some necessary corporate formalities. The agenda will usually include appointing corporate offices, adopting bylaws, authorizing the issuance of stock, adopting a stock certificate form and corporate seal, establishing the fiscal year, and approving the election of S corporation status if desired.
Issuing stock is the most complicated aspect of forming a corporation. The company should not begin any business transactions until the shares of stock have been issued. Otherwise, you could lose the legal protections offered by corporate status. These shares formally divide ownership interests in the business.
Issuing stock must be done according to securities laws. Large corporations must register stock offerings with the SEC, or federal Securities and Exchange Commission. There is also a state securities agency where you must register the stock offering. The process is often time consuming and costly.
Smaller corporations are exempt from securities registration. Unadvertised share offerings to less than 35 people are rarely regulated. Also, if the shareholders are already well off, the SEC will be less concerned about registering the sale. Most states have similar rules. If your corporation is issuing shares to ten or fewer owners, you need not worry about filing the sale.
When selling shares to passive investors, people who do not actually run the company, SEC laws become difficult to navigate on your own. In this instance, it is vital to secure advice from a good business attorney.
When the shares are issued, you must document certain information about the sale. Record the names of the initial shareholders, the number of shares each will buy, and how the sales are funded. Once this is done, you can issue stock certificates. Some states will ask that you file a notice of the transaction at the state corporations office.
Licensing and Permits
The final step in the process of incorporating is to secure any necessary licenses or permits. You are required to secure a business license or tax registration certificate. In most cases, you also need an employer identification number for IRS and state tax purposes. Most states require a seller’s permit or a zoning permit from the planning board. Once these steps are in place, you are ready to do business.