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.
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.
The state of New Jersey offers incentives to small business to do business in the state in many ways. The Urban Enterprise Zone or Work force training programs by the state have positively impacted many New Jersey businesses in their growth and development. NJ incorporation is possible by filing the required Certificates of Business information with the Division of Revenue. You may file online or through paper documents and pay the filing fees to obtain authorization to conduct business in the state. As to why incorporate, the corporation has many advantages over other forms of business. The main advantage is that corporations are perpetual and investors contribute more readily because of the easy transferability of stock or shares in a corporation.
Forming corporation in New Jersey can be accomplished by filing Certificate of Incorporation and submitting Business registration application with the New Jersey Division of Revenue. The basic requirements for forming a corporation in New Jersey are:
Corporate Name: You must determine that the name you have selected for your corporation is available for use before filing the certificates of information for business registration. The name must not be similar to an existing New Jersey business entity. You must also not include terms and language prohibited by the state statute. The name availability check is automatic if you are filing online.
Certificate of Incorporation: The certificate should contain certain basic information regarding the corporate organization. It should list (1) the name and address of one director at the least. If there is more than one director, all their names and addresses must be listed (2) the aggregate number of shares, each class of shares and the privileges assigned to each class (3) the registered office address of the corporation, which must be a NJ street address (4) the designated registered agent and his New Jersey communication address. There can only one registered agent for a corporation. The certificate of incorporation may include additional information optionally if you wish to formalize them.
Bylaws: The directors must hold the first meeting and adopt the bylaws of the corporation. The bylaws are the charter under which the corporation will function and operate its business.
Your corporation can elect to be a C Corporation or an S Corporation under New Jersey Statutes. The C and S are not different corporate business structures but tax classifications. The C Corporation is subject to corporate tax; it has to pay federal and state income tax on profits from business directly. When the profits are distributed among the shareholders, they pay tax on that as their personal income. S Corporation advantages are, it has a lower corporate tax and has a pass through taxation. The shareholders pay tax on their share of profits through their personal tax returns.
Small business incorporation is advantageous to entrepreneurs with a vision to grow and attain great heights in their business career. Unlike other business structures, corporations have the ability to attract capital from investors. Transfer of ownership in a Corporation is easy and convenient. When the business needs more capital, the authorised capital can be enhanced quickly and fresh stock can be created and sold as equity to generate required funds. Incorporate yourself and take advantage of all that a corporate business structure has to offer.
Now that you understand as to why incorporate, let us understand how to incorporate yourself. Business entities are created and governed by state statutes. By incorporating your business you will be creating a separate legal entity under the eyes of the state law. The separate entity has to assume obligations and duties as that of a normal person in business. To ensure that a corporation is not used as façade by the owners to indulge in nefarious activities because of the limited liability status it bestows on the business owners, states stipulate lengthy formalities and procedures in a corporation’s formation and operations. You have to comply with all the statutory and legal obligations for forming and operating a corporation in a state. Generally business registrations are managed by the Secretary of State’s or a Corporation Commissioner’s offices. Check with these offices to understand the correct formalities to incorporate yourself.
The first requirement for small business incorporation in almost all states is to file an Articles of Incorporation with the agency handling incorporations and pay the required filing fees. The Articles should contain all the basic information about the intended corporation and its proposed business. You will need a registered agent in the state to handle all the paperwork and formalities on behalf of the corporation. Usually the Articles of Incorporation is a standard pre-printed form with blanks for the required information. You as the incorporator have to fill in the blanks, sign the form and submit it to the corporate filing office. Further to the filing, you require to appoint the directors and office bearers of the corporation propose and adopt bylaws in the first meeting held for the purpose. Bylaws are the basic tenets under which the corporation and its officers and directors will operate the corporations business. Each and every activity or decision other than the routine business operations of the corporation has to be passed with resolution in a board meeting and recorded in the minute book. Refer to the states corporation code to know all the formalities involved in running a corporation.
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.
Business partnerships are basically of two types, General Partnerships and Limited Partnerships. In a general partnership all partners are equally responsible for the management of the business and share of profits unless otherwise stated in a partnership agreement. Business partnerships are easy to form and operate. There are no legal or statutory formalities involved in the formation of a business partnership. Likeminded people can get together and start a business. When the partnership business is by intent, all partners are considered equal in rights and responsibilities. Regardless of what each partner has invested in the business, all partners have equal right to the profits and are personally liable to all business obligations and debts. General partnership interests can be structured in any way the partners have mutually agreed to or set down in a partnership agreement.
Most states follow the Revised Uniform Partnership Act in the matters of business partnership law. As partnerships are formed between persons for profit-for-businesses and as state and federal laws broadly define “business” and “persons”, the partnership business operations are supposed to be adequately covered under those laws. Specific partnership laws or acts have not been enacted due to this reason.
The advantages of a business for profit partnership are that it involves no formalities in formation and have great flexibility in organization and management. If your business is small and does not involve too many potential risks, partnership is an ideal business structure for two or more persons to jointly do business. It offers benefits in taxation and other statutory formalities also.
The main disadvantage of a partnership business is that the business owners are personally open to all business risks and obligations of the partnership except in a limited partnership. All partners are jointly and severally liable to settle all business obligations and debts of the partnership. They will be held equally responsible for the partnership activities regardless of anything to the contrary in the partnership agreement. If the partnership defaults payments to its creditors and lenders or if a liability or claim arises due to an action or inaction of the partnership, every partner’s personal assets can be appropriated to settle the creditors or the claim. Another disadvantage of a partnership is the continuity of the business. If any of the partners become disabled or deceased, the partnership will get automatically dissolved.
Now the reasons for why incorporate will be apparent. Personal liability and continuity of the business is at risk in a business partnership. The personal liability of shareholders in a corporation is limited and does not affect personal property. Corporations are “forever’ meaning it is not dependent on its shareholders for its continuity.
The advances in technology in the last two decades have been tremendous. Most of what we did manually a few decades earlier is possible now with the click of a button. Access to information also has made fantastic strides. Information about A to Z is available on the Internet or comes in concise digital formats in CD’s that are easily readable and understandable. The layman is empowered by this. Business form software for any application or use is readily available. We have to take advantage of these advances and developments. You may use Business software packages for incorporating your business. Most of the business form software packages have all documents and forms that you may need in your whole business life.
As to why incorporate, the answer lies in your business. If you have grown beyond your original estimates and your business volume has achieved critical mass, it is time for you to reconsider your business plans. Every business has risks associated with it. The risks grow in proportion to the volume of your business. If you are carrying all that risk of business liability on your person, a small misstep may wipe out all that you have worked hard at for years. By incorporating your business you limit your personal liability to the business obligations. Incorporation is necessary to grow also. If you need to attract capital to expand your business, incorporation is a good move. Investors are comfortable in investing in corporations because the only risk they assume is the loss of capital.
The incorporation of your business is not a tedious process and can be done easily enough. Corporations are formed under state laws and you have to comply with your state’s rules and regulation for incorporating your business. You have to file an Articles of Incorporation containing critical information regarding the corporation’s basic purpose and organizational structure with the state agency dealing with corporate registrations. Many states issue a Certificate of Incorporation evidencing the legal existence of the corporation. The Articles of Incorporation is the main document stating all that is important about your business such as the purpose for which the corporation was formed, the name and address of the incorporator(s), proposed directors, principle place of business, Intended share capital etc. After incorporation you need to draft and adopt the bylaws of the corporation in the first board meeting of the directors. You may also adopt a corporate seal for your corporation though most of the states do not mandate a corporate seal.
Running a business for profit has its inherent benefits and risks. The benefit of course is the profit you expect to earn from the business. In large corporations fringe benefits are also a factor to running a business. The inherent risks are many. The business owner may borrow money for long term investment or working capital requirements. Have creditors in the form of suppliers or services providers, employ people, supply products or services etc. All these activities generate potential liabilities for a business owner. That is why a C Corporation is advisable for running a substantial business. In a C Corporation, the business owners, generally known as share holders contract no personal liability for the corporation’s business activities and obligations.
Choosing a legal structure for your business depends upon the type of activity you do. A C Corp is not an easy structure to form and maintain. There are considerable expenses and formalities involved in forming a C Corporation and running it. The corporation has to be registered with the domicile state agency and pay considerable fees for filing its application and other relevant documents. An Articles of Incorporation and Bye Laws have to be drawn up. You may adopt a corporate seal, but in many states it is not a mandatory provision.
If your business does not involve transactions that have potential for future liabilities, you may opt to run as a sole proprietorship or if two or more individuals are involved, as a partnership. Both forms of business structure do not require any formal procedures to set up and conduct business. The income tax return for profit or loss from business is filed along with the sole proprietor’s or partner’s annual return filings. No taxes need be paid by the business itself. For small business operators, Limited Liability Company is a good option where the business owners or members can limit their personal liability for business debts obligations.
In a C Corporation, the business has its own legal entity that is separate from the share holders. Statute treats a C Corporation as an independent entity. The corporation can enter into a contract or obligate itself without personally obligating any of its share holders or office bearers. The C Corporation is the only business structure that does not have a pass through tax structure. The corporation has to file yearly tax returns separately from that of its shareholders. Share holders have to report any profit distributed by the C Corporation in their personal income tax returns.
Stock certificates are legal documents that evidence the ownership of a specific share of a corporation. Stock certificates are issued at varied times in line with the corporate policies. You may issue the stock certificates to your primary investors after incorporation, to secondary investors when the issued capital is being enhanced etc.
Stock certificates are basically of two types. You can issue a registered stock certificate or a bearer stock certificate. Registered stock certificates are issued in the name of a bona fide investors and their name and addresses are recorded in the corporation’s stockholders register. The bearer stock certificates are issued as the name implies is a bearer instrument meaning, the physical possession of the instrument awards ownership.
Forming a corporation is the first step towards issuing stock certificates.. There are formalities and procedures involved in forming a corporation. State laws determine the rules and regulations under which a business can be incorporated in that state. You have to file the necessary application forms along with the articles of incorporation and pay the due fees. The articles of incorporation are your charter under which you will operate as a business entity in the state.
Once the formalities of incorporation is over, you proceed with the rest of the formalities of a forming a corporation. In the Articles the directors of the corporation would have been named. These directors hold a first meeting of the corporate board of directors and act on certain important tasks such as setting the corporate financial and accounting year, adopt the corporate byelaws, authorize issuance of share or stock certificates and appoint corporate office bearers. Once the stock certificates are authorized to be issued by the board of directors, the corporate officers print and issue the stock certificates to the stock holders.
Forming a corporation is best suited for large and medium business where the capital requirements are huge and highly impossible or imprudent for individuals to invest directly. As to the question Why incorporate”, by bringing in a collective of investors and their resources, professional business men manage to raise sufficient capital needed for such large business ventures. By incorporating, a separate legal entity is created and the investors are not personally responsible or liable for the entities actions or obligations. Some of these professionals prefer offshore incorporations to side step many of the restrictive regulations in states and by the federal government. Additional financial considerations like lower tax rates and tax holidays are also attractive terms to them.
