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.
Creating a legal business entity is a must do for operating a business. It provides your business with an individuality and separate existence. The first step to forming an entity is to know the appropriate legal business structure for your business. There are advantages and disadvantages in forming and operating any of the legal business forms. A business operated by a single person can assume the form of a Sole Proprietorship. If the business is operated by two or more persons, forming a general partnership is advisable. When only one of the business owners is actively operating the business and others are passive investors, you may form a limited partnership. These legal forms of business are simple to form and operate and do not involve too many legal formalities except for licences and registrations required for the business to operate in your state.
The main disadvantage of the above mentioned business structures are that the business owners personal liability is unlimited. The partner or sole proprietor is personally responsible for all business activities and liable to pay all business debts or obligations regardless of their interest in the business with an exception of the limited partners. To overcome this disadvantage you may adopt a structure that limits the personal liability of the business owners in business obligations. Forming a Limited Liability Partnership, Corporation or a Limited Liability Company will serve the purpose. In these forms of legal business structures, the business owner’s liability is limited to their capital contribution. Many statutory and legal formalities are involved in forming and operating these business structures.
Why incorporate is because corporations are suitable for businesses which need considerable capital infusion and time to grow and prosper. Corporations have a separate legal identity from that of its owners. Business continuity is not affected by the disability or death of a business owner in a corporation. There are two types of corporations, a C Crop and an S Corp. Though the basic structures of the both entities are same, S Corporation advantage is that it has a pass through taxation. The shareholders can report their share of profits in their personal tax returns and pay tax there. The C Corporation profits are subject to corporate taxation and when the profits are distributed as dividends to share holders, they in turn pay taxes on these profits again. To start a corporation, you have to understand the basics of incorporation. Business entities are formed under state rules and regulations. To understand how to form a corporation, you consult the state agency dealing with incorporations in your state.
Going offshore for incorporating businesses has its advantages and disadvantages. If all your deals are overboard and in black and white, offshore company incorporation can provide you with certain advantages over forming a corporation domestically. The main advantages are that the offshore location may have low tax regimes or tax exemptions and ease of operation. You may not be required to file your annual returns and can maintain complete confidentiality of operations. In some locations the cost of operations when compared to your home state may be substantially low. Beware, offshore company information does not provide you with a license to indulge in your fancies. International community is putting enormous pressure on these tax havens to institute more restraints on their corporates to control narcotic drug money and international terrorism.
Forming a corporation domestically is not that difficult or complicated. State statutes govern the formation and operation of corporations. Your first step to know how to form a corporation is to get in touch with the state agency handling business registrations. Usually business registrations are handled by the Secretary of State or Corporation Commissioner’s offices. As most states are actively encouraging new business formations in their territory, you can be sure of a high degree of co-operation from the state authorities for forming a corporation. The basic requirements are, you have to file the Articles of Incorporation of your corporation with the state and pay a fee for filing. Drafting and adopting bylaws for the organizational and operational functionalities is imperative in forming a corporation and operating it.
You must have a name for your corporation to operate under. It could by your name or a fictitious name for your corporation to Do Business As. The name you choose cannot be identical or similar to that of a business in existence. Using an existing name may land you in trouble, end up being prosecuted under the Intellectual Property laws and made to pay damages. You can search for an available name in the state business registry and other databases available. Business.Gov, the official business link to US Government website suggests that you search in multiple data bases to check name availability. The Thomas business register is supposed to be an exhaustive source. National Business Register is compiled by the US Census Bureau to provide a comprehensive database of US business establishments and companies for statistical program use. United States Patent and Trademarks office has a database of all federally registered trademarks.
Business is to earn profit. To earn profits you have to assume risks. These are the two basic tenets of business-for-profit. As man is wont to, we innovate and form new practices. Now it is possible to do business with limited risks. Limited Liability for business owners in their business obligation is a legally accepted fact. Corporations and Limited Liability Companies are taken for granted in the ordinary course of life. These business structures are meant for operating considerable business with limited liability to the business owners. Limited Liability Company is an advanced form of a general partnership. The only difference is that the partners or members as they are termed in an LLC, have limited personal liability towards the business debts or obligations. This does not mean that by forming an LLC or a Corporation one is scot free to do anything they wish. Criminal acts or wilful negligence is still punishable under the law.
Corporations have become the most common legal business structure for budding entrepreneurs with a vision to grow. Small business incorporation is now easy with states encouraging small business operators. States are actively soliciting entrepreneurs to start business in their territory by simplifying formation procedures and formalities. Some states even provide tax holidays or subsidies for niche businesses. To know how to incorporate yourself, all you need to do is get in touch with the agency handling business registrations in your state. Usually this is handled by the Secretary of the state’s or Corporations Commissioners offices.
There are a few basic rules on how to form a corporation. First step is to find a name for you to incorporate under. Care is needed in doing this. You cannot use a name which is identical or closely similar to that of any existing business. You will have to check with the agency handling corporations in your state and the corporations register to make sure that the name chosen is available for use. Then you file an Articles of Incorporation paying the due fees. The Article is usually a pre-printed form which should be filled in and signed by the incorporator or the promoter of the business. It will contain the basic information about the corporation and its functions. A bylaw of the corporation to set the rules and policies for the operation of business is a necessity. It will act as a guide to the directors and office holders of the corporation in executing their duties and handling their responsibilities.
Forming a corporation is a bit more complicated than forming a limited liability company; it is also more expensive. Choosing to incorporate your business instead of forming an LLC is usually done because for some businesses a corporation provides better tax advantages than a partnership does. Both a corporation and an LLC are protected under the corporate veil, so the deciding factor is usually the tax benefits.
If you are thinking about incorporation, you will need to learn how to form a corporation. Learning how to form a corporation is easy, you can often do everything yourself. Here are the steps you will need to take to form a corporation.
Step one:
You will need to come up with a name for your corporation. When choosing a name for your corporation you will need to comply with the rules of the state that you are incorporating in. Most states will require you to use a unique business name, it cannot be the same or similar to any business names already on file with the corporations office. To prevent this you will need to perform a name search before forming your corporation. The name also has to have a corporate designator in it, such as Corporation or Inc. You also must avoid certain words that might suggest your corporation is involved with the federal government or is a restricted type of business.
Step two:
You will need to appoint directors for your corporation. When appointing directors for your corporation you want to keep in mind that the directors are going to be making the major policy and financial decisions for the corporation, so you want to choose wisely. The directors do not have to be the owners of the corporation, but most corporation owners appoint themselves as directors before the corporation opens. How many directors your corporation can have depends on the number of owners and the state you incorporate in.
Step three:
You need to prepare your articles of incorporation. The articles of incorporation do not have to be complicated; you can often do them yourself. If you do not think you can do them on your own you can hire a company or a lawyer to help you prepare them. The articles of incorporation need to include a few basic details about your corporation. The main thing it needs to include is the name of the corporation, the address of the corporation, the name of the corporation’s directors. You might also need to include a registered agent for the corporation; this is true if none of the directors is listed in the articles of incorporation.
Step four:
You will need to file the articles of incorporation after you have prepared them. When filing the articles of incorporation you will need to pay a filing fee that ranges from $100 to $800 depending on what state you are incorporating in.
Step five:
You will need to draft the corporate bylaws. The corporate bylaws are the rules that your corporation is going to follow so that it can smoothly operate. The corporate bylaws include when and where the corporation will have meetings, what the voting requirements are, and anything else that deals with the day-to-day running of the corporation.
Step six:
You will need to hold a meeting for the board of directors. The reason this meeting needs to be held before your corporation does business is that you need to make a few decisions that deal with the running of the corporation. At this meeting, you need to set the corporation fiscal year, appoint corporate officers, adopt the bylaws, adopt a corporate seal, and make the decision about issuing stock.
Step seven:
You need to issue the shares of stock based on the decision in the board of directors meeting. Issuing the stock is a way to divide the ownership of the corporation, but it is also a requirement of doing business as a corporation. If you want, the protection that is offered to corporations you have to act like a corporation at all times.
