Forming a corporation requires compliance with state laws and regulations. Incorporation formalities and regulations vary in each state. Refer to your state’s laws and regulations for forming a corporation. Basically all states require articles of incorporation to be filed with the state authority dealing with business registrations. In some states it is called a Certificate of Incorporation or Charter. The articles or certificate of incorporation must contain all the critical information regarding the promoters and purpose of the corporation. An article or certificate typically contain
- Name of the Corporation.
The proposed corporation’s name is the first article. The name must not be identical or closely resembling an existing business name in the state. You may have to consult multiple databases to ensure this. States maintain business registers of all registered names and trademarks. The name must include a term such as ‘Company’ or ‘Corporation’ or abbreviations suggested by the state laws.
- Registered Address.
The corporation must have a local address as it registered office or principal place of business
- Duration:
Some corporations may be formed for specific purpose and duration. Generally corporations are “perpetual”
- Business purpose.
The purpose for which the corporation is formed, the business it proposes to conduct. You may state that “all lawful business permitted by state law”. There are some restrictions on the types of business a corporation can engage in.
- Authorized Capital:
The number and class of shares the corporation is authorized to issue and the par value of a share should be stated.
- Registered agent:
The Corporation should have a registered agent with a local address for process serving and his consent to act as registered agent should be included.
- Name and Addresses of Incorporators.
- Name and Addresses of Directors
The above articles may not be in the same sequence in every state and some states may require more or less articles from the above. For example, Connecticut state certificate of incorporation require that the class of shares and it specifics like voting rights, transferability etc be stated. DC requires that the business articles be stated in detail. Publication of notice of intent to incorporate is part of some states incorporation requirement.
Limited Liability Companies or LLCs also provide personal liability protection to business owners. Forming LLC also requires legal and procedural formalities to be complied with. In an LLC, the charter to operate is in the form of Articles or Certificate of Organisation which will state the purpose and essential information about the promoters. Some states require a LLC operating agreement to be filed with the state.
Every form of business has potential risks and liabilities. Choosing the apt legal form for your business depend on the degree of the potential risks. If you operate a business that has minimal risk potential, you may assume the forms of sole proprietorship or a partnership if two or persons are involved in the business. Proprietorships and Partnerships are easy to form and operate. Hardly any legal formalities are required to be complied with. Whatever business permits or licenses needed to operate a business has to be taken care of. The issue with these legal forms of business is that they do not protect the business owner’s personal assets from business debts. If the business defaults payments to creditors or lenders, the business owner will have to settle by using personal resources. This is the reason why you should not remain a sole proprietorship for long.
Business owner’s personal liability to business debts can be limited by forming a Corporation or a Limited Liability Company. State laws have to be complied with for forming both forms of business. There are a few formalities required for the formation. Limited Liability Company can be formed by filing an Articles of Organization with the state department managing business registrations and paying a fee. Limited Liability Company offers personal limited liability protection and flexibility in managing the business operations as in partnership or sole proprietorship. LLC can be constituted with a single member or multiple members. Another advantage with LLC is that it can elect to be taxed as any of the other IRS tax classification that is more beneficial in tax planning.
Forming Corporations entail extensive procedures. As any business entity, Corporations are also formed under state statutes. Procedures and formalities in incorporating your business may vary in each state. Corporations offer the limited liability protection to its share holders. This is the most adopted form of business due to its perpetuity and strict regulations controlling its operations. Lay investors prefer corporations above other forms because buying and selling shares in a corporation is easy. If you have plans for your business to expand beyond the status of a small business, corporations are your best bet. Why incorporate is because of these qualities of corporations. It is easy to attract capital and business continuity is not dependent on its business owners. Corporations can be of two types. S Corporations and C Corporations. Though the legal structures of both are same, there are some restrictions in S Corp business ownership. The taxation differs, S Corps have a pass-through taxation whereas the C Corp is subject to corporate taxation.
It is imperative that you have a legal form for your business. It provides a separate existence to the business from your person. The common legal business forms are Sole proprietorship, Partnerships, Corporations and Limited Liability Companies. Each business forms have benefits and risks associated with it. Choosing the appropriate business form for your business is dependent on the type of business you operate and its related risks. Sole proprietorship and partnership are the easiest business forms to adopt as no legal formalities and procedures involved in forming and operating (other than required business permits and licenses). Formation of Corporations and Limited Liability Companies require lengthy procedures and formalities and is comparatively expensive.
When two or more persons are engaged jointly in business, a partnership is the appropriate business form to adopt. Before you enter into a partnership and operate a business, understand the basics of a partnership business. Partnership law stipulates that all partners are jointly and severally liable for the debts and obligations of the business. Severally means that the liability is not in proportion to the partner’s interest in the business but for all of the debts. If one partner is unable to meet his or her part of the liability, other partner or partners have to make good for it. Even after the dissolution of the partnership the liability continues for deeds during the existence of the partnership. Keep this in view always when you constitute a partnership and do business.
A valid partnership can be formed without any formal documents, merely the intent to carry on any trade or business jointly by two or more persons will constitute a partnership. But, as the business activity is conducted by two or more persons, difference of opinion is a strong possibility. The importance of have a written partnership agreement is that it is prudent to have everything in black and white to avoid any future disagreements or misunderstandings. The partnership agreement should clearly state all critical matters such a:
1) capital contribution by each partner
2) the business to be carried on
3) each partner’s rights and responsibilities
4) profit or loss sharing ratio.
If only one partner is active and other partners are dormant investors, a limited partnership can be formed. The active or general partner is then liable for the business debts and dormant partner’s liability is limited to their capital contribution. Generally this form is used for a family limited partnership where the dominant member operates the business and other family members do not actively get involved in business decisions or operations.
Every business form has inherent advantages and disadvantages in operation and maintenance. If you are operating as a sole proprietorship or a partnership, the advantages lie in its operational flexibility and taxation procedures. Sole proprietorship or partnership requires few formalities to be complied with for formation or maintenance. The main disadvantage is that the business owners are personally liable for all the business debts and obligations. In a partnership, all the partners are personally liable to the partnership activities and if one partner is unable to meet his or her part of the obligations the other partners have to make good for it.
Limited Liability Companies and Corporations offer personal liability protection to its business owners. The disadvantage in these business forms is that the formation and maintenance entails compliance with state laws. The business owners have to pay yearly taxes for operating these entities and are required to file various returns to Federal and State governments. As the state statutes govern the formation and operations of LLC and Corporation and the rules vary in each state, you have to refer to the respective state statute on how to form a corporation or LLC.
Changing your business form from a sole proprietorship to a Corporation offers many advantages. The foremost as to why incorporate is the limited liability protection it offers. A corporation is a separate legal entity in the eyes of law and the corporation’s business deals do not affect its shareholders or officers personally with some exceptions. Incorporation is governed by state rules and regulations like that of all other business entities. Incorporation rules may vary in each state. To start a corporation in any state the basic requirement is to file Articles of Incorporation with the state. Each state has its own stipulations as to the information to be stated in the Articles (or Certificate as called in some states). The name of the corporation, main purpose for which the corporation is formed, the authorized share capital and class of shares, voting rights and preferences of each class of shares, names and address of the incorporators and directors, the registered address which must be a local address, a registered agent or officer for process service with a local address and the person’s consent to act as agent etc. are some of the critical information required by states to be stated in the Articles. Filing an article and obtaining a certificate of incorporation does not authorize the corporation to start business. All the business permits and licenses required by Federal and State laws have to be obtained.
While operating a business it is advisable to have a legal form for many reasons. Essentially your business should have a separate identity from that of your person to keep things in perspective. The business operations, its success or failure can be effectively monitored. Moreover, keeping a separate book of accounts will help in filing yearly tax returns. Formation and operation of legal business forms are governed by state statutes.
The legal forms for operating a for-profit business are Sole Proprietorship, Partnership, Corporations and Limited Liability Company. Each legal form has its risks and benefits. Sole Proprietorship is suitable for an individual operating a business without a great deal of risks or potential liabilities. If you are jointly operating a business with two or more persons, partnership is suitable. Both these forms of business are simple to form and easy to operate. The inherent risk in proprietorship or partnership is that the business owners are personally liable for all business debts.
Limited Liability Company or LLC and Corporation offer limited liability protection to business owners. They are not personally liable for the business’s debts or obligations. Forming a LLC or a Corporation requires compliance with state laws. To set up an LLC or a Corporation you have to file certain documents with the state as required by the state statute and pay a filing fee. You may have to pay a regular yearly fee to the state for the maintenance of these business entities.
Corporation has a separate legal existence from that of its share holders. In the eye of law, corporations are ‘persons’ and are treated as such. Due to the separate legal entity status, the office bearers of the corporation are obliged to conduct the business operations strictly in accordance with the regulations governing corporations. LLC has comparatively more flexibility in business operations. While it has the personal liability protection as in a corporation, it offers the flexibility and taxation benefits of a partnership or sole proprietorship.
How to form an LLC depends on the state in which it is registered. Rules and regulations on how to LLC vary in each state. The basic requirement in all states is to file articles or a certificate of organization and pay a filing fee. Some states require an operating agreement and publication of the intent to form a LLC additionally to that of the articles. LLC is not a tax classification in the Revenue Code. LLC’s can elect to be taxed as any of the other tax classifications which is convenient and beneficial to its business owners.
Limited Liability Company is relatively a new form of legal business structure. Now all the 50 states allow Limited Liability Companies (LLC) to register as a business. The business owners of LLC are termed ‘members’. LLC can have single or multiple members. LLC is formed under the state statutes. There are variations in rules and regulations governing the formation and conduct of LLC in different states. LLC definition is that it provides the limited liability protection offered by a corporation with the operational flexibility of a partnership. LLC are not a tax classification for federal or state tax laws. LLC taxation can be according to the member’s choice. The members can elect to be taxed as a partnership, C or S Corporation.
The basic guidelines for how to LLC formation is
Name availability: Your LLC needs a name to operate under. You have to check whether the name you have chosen is actually available for use. The issue here is that the name you have chosen must not be identical to that of an existing business. Your option to check whether the name is in use is to consult your state’s agency handling LLC registrations or search online resources. The name must contain the words ‘Limited Liability Company’ or ‘LLC’ or such other abbreviations that conveys the company’s limited liability status. Some word or terms such as corporation, bank or insurance or others specified by your state are prohibited from being the part of a LLC name.
Articles of Organization: Some states call this as Certificate of Organization also. For an LLC to come into existence in any state, this document must be filed and the filing fee paid. The Articles or Certificate must contain all the critical information regarding the LLC.
- Proposed name and address of the LLC
- Name and addresses of all the initial members
- Name and address of the resident agent or agent of service of process.
- Purpose of LLC formation
- Business activity
- Membership interests (rights and responsibilities of the members)
The above information may vary with each state.
Operating Agreement: Only some states mandate that an LLC operating agreement also be filed along with the Articles. As a rule, this document is imperative in every LLC’s existence. It provides the LLC with individuality separate from its members. The basic information required is
- Membership interests
- Management policies
- Business ethics
- Membership transfer conditions
Public Notice: You have to issue a public notice on the intent to form you LLC. This is required in some states only.
Internet and online activities have changed our life in unimaginable ways. You can do most of your work sitting at home or office without stepping out. The cost of getting things done have come down because of this. Forming a corporation used to involve a lot of visits to the lawyer’s offices and state agencies and fees and expenses used to be considerable. Now online cheap incorporations are possible. You can bypass using a lawyer and incorporate online swiftly for reasonable cost. Online incorporation services are prolific on the internet and you can choose one according to your budget. You may still have to consult a lawyer for drafting the bylaws, share holders agreement or other legal documents.
Certain formalities are to be complied with for forming a corporation. Before opting for cheap incorporation online, it will be advisable to understand what you are getting into by incorporating your business. If you have decided to incorporate out of state in one of those tax haven states, have you thought about what will be needed to operate the business in your state? Or, is the corporation the right business structure for you and why not an LLC? Consulting a lawyer for your incorporation will provide you with the right answers and advises. But that does not necessarily mean that you have to consult a lawyer for forming a corporation. You may opt for online cheap incorporation if you have the confidence that all angles regarding the incorporation have been covered.
Cheap incorporation or costly, you still have to pay the fees for filing your articles and other permits and licenses. You need a resident agent with a local address if you are incorporating out of state and you have to file annual corporate returns, pay corporation tax every year till you decide on dissolution. All this cost money and before starting on incorporation it will do good to think about all this.
Online cheap incorporations does not mean that they are cheap as in substandard. If you have done your homework and comply with the incorporation formalities correctly, online incorporations will not only save you money but also time. Online incorporation if properly executed will provide faster results due to the ease of operations for the state agency handling incorporations and other business formalities. Most states nowadays encourage online activities for this reason and some states insist on filing your papers online.
The legal structure you choose for your business should be in consideration of the risks and benefits it offers. Simply because a business structure has a few advantages over another, it is not prudent to adopt a business structure without weighing the pros and cons carefully. Likewise, choosing between an LLC or an S Corp depend on your business activities. Both the legal forms LLC or S Corp offers limited liability protection to its business owners, members in LLC and share holders in S Corp. Basically the holding structure is significant in adoption of LLC or S Corp for your business.
Limited Liability Company or LLC can be constituted with a single or multiple members under state statute. LLC is a relatively new form of business structure. Internal Revenue Service has not created a new tax classification for LLC. A LLC is still classified as a Sole Proprietorship, Partnership or Corporation for taxation purposes and the choice to elect the tax classification is left to the members. LLC members can be natural persons, other business entities and even aliens. In most of the states there are no restrictions on ownership. LLC provides the benefit of limited liability as a corporation with the flexibility of management and operations as a Partnership. LLC can elect to have pass-through taxation as in a partnership or sole proprietorship. Members can report their pro rata share of the LLC profit or loss in their personal tax returns and pay tax if applicable. Unless otherwise restricted in the Articles or Organization or Operating agreement, the membership in a LLC is easily transferable.
An S Corporation is no different from a C Corporation in form and structure. S Corporations are constituted by shares, which are easily transferable unless otherwise restricted in the Articles of Incorporation. The ownership has a few restrictions. S Corporations cannot have more than 100 shareholders; all shareholders must resident citizens and natural persons. There can only be one class of shares and dividend has to be distributed in proportion to the share holding. The main difference between a C and S is in taxation. C Corporations are subject to corporate taxes and have to pay tax on its profits. When the profits are distributed as dividend to share holders, they have to pay income tax on that which essentially is double taxation. S Corporations do not pay corporate tax but the shareholders report the profit in proportion to their share holding in their personal tax returns and pay tax. In LLC Vs. Corporation, the major advantages of LLC lie in its unrestricted ownership and flexibility in management. Corporations are subject to many formalities in incorporation and operations.
