6 Steps: How to Become Incorporated

Paul and Chiara are a married couple that started a children’s clothing business after having their daughter, Francesca. Together they provide the community of Pacific Palisades with quality kid’s clothing, furniture, and old-fashioned toys. After a few years of successful business, Chiara suggests that they incorporate their business. Paul is unsure. He does not understand the benefits of becoming incorporated, or what a corporation really is. Chiara explains to her husband that becoming a corporation can help protect their family by limiting their liability in case of a lawsuit. They won’t have to worry about losing their car, their home, or their savings. Also, by adding “Co.” to their name, their company will gain credibility and legitimacy, which will attract more vendors and customers.

By: Brad Nakase, Attorney

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When a business is incorporated, this means that it is becoming an entity that is legally separate from its founders. Like a person, a corporation can own property, sign contracts, be sold, and even live on after a founder leaves or passes away. If the corporation goes bankrupt, the founder cannot be held personally liable, meaning his or her assets are safe from a lawsuit.

Each state’s process of incorporation is a little different, but there are a few major steps to be aware of.

1. Choosing a Business Name

When it comes to choosing a name for one’s corporation, there is only one big rule to keep in mind. Legally, a corporation cannot have the same name as another corporation in that state (or a super similar name). But how do you know if someone else already has the name you want? The relevant state will have a corporation search service that can be used to check the availability of a name.

Nowadays, it is a good idea for a corporation to have a domain name. Therefore, one should research whether a relevant domain name is available to use. To check this availability, a founder can use a web hosting service like Go Daddy.

Once one thinks of a name and checks to make sure it is available, it may be a good idea to get a trademark. To ensure that one’s trademark is unique, one should search it in the United States Patent and Trademark Office.

2. Picking a Location

When becoming incorporated, a business will require an address to register. The address must of course comply with state and local government codes and regulations.

In the current climate, some businesses are using virtual offices or shared workspaces, which also help keep costs low. One could also sublet an office space.

That said, if one’s business is larger in scale and has several employees, then a commercial office space may be necessary.

3. Deciding on Corporation Type

There are two types of corporate entities: limited liability companies and corporations.

Limited Liability Companies (LLCs)

Often, small business will start out at LLCs. This type of entity may be considered a combination of a partnership and a corporation. Members own and manage the LLC, and all of them hold stakes in the company that total 100%.

One can create an LLC by filing Articles of Incorporation with the state government. This document identifies members, managers, and a registered agent for service of process.

LLCs usually do not need to have a formal operating agreement, but LLCs with a large number of members are recommended to consider this option.

The operating agreement contains the following information:

  • The relationship between members
  • Responsibilities of members
  • Structure between members and management
  • Each member’s capital investment
  • Percentages of ownership
  • Dispute resolution plans

A business owner can also consider forming a corporation. There are two types of corporations: an S corporation (S corp) or a C corporation (C corp).

C Corporation

Generally, C corporations are large businesses. A C corp is owned by its shareholders and is managed by a board of directors. Officers in C-Suite positions (CEO, COO, etc.) run the company day to day. C corporations receive double taxation. This means that they are taxed on profits and again when those profits are passed onto shareholders. Shares of C corps are bought and sold on the stock market.

S Corporation

Generally, S corporations are smaller businesses. S corps can choose to have their business taxed on a regular basis or have the business be a pass-through entity. A pass-through entity means that the owners pay the business’ taxes via their personal tax returns. Normally, an owner manages and runs an S corporation.

Once a business owner decides on what type of business he or she would like to set up, it is time to file Articles of Incorporation. Though there are slight differences between states, this form includes an explanation of shareholder structure and identifies initial directors.

After the Articles of Incorporation are filed, it is normal to hold an initial shareholder meeting. This is held as a formality, mainly to discuss stocks and adopt bylaws. Bylaws address subjects such as meeting times, corporate officers, voting, contracts, and signing of checks. While bylaws are optional for LLCs, corporations often require them.

4. Getting a Tax ID Number

Just as people receive a Social Security number from the IRS, businesses also receive an identification number. The IRS will assign businesses an Employer Identification number, also known as an EIN. To receive an EIN, an application may be filled out online via the IRS website. Even if a corporation doesn’t have employees, it must still have an EIN.

5. Setting Up Banking

After a corporation has been named and has received an EIN, a corporate bank account may be set up.

Having a corporate bank account helps to establish the independence and legitimacy of the business by emphasizing the separation of the owner and the business entity. This has the added benefit of acting as a shield, protecting an owner from liability. It also makes filing taxes easier, as well as general accounting.

After a corporate bank account is set up, the next step will be to discuss what the appropriate method of taxation is for the particular business. As reviewed above, LLCs and S corps generally have pass-through taxation, while C corps have double taxation.

6. Securing Permits and Licenses

When it comes to getting the relevant permits and licenses, much depends on the type of business and where it is located.

After the first meeting of the board of directors, larger corporations will have to file with the state. Federal securities regulations will apply if stock is being sold.

Permits and licenses range in type and purpose. Some examples include:

  • Licenses and permits for the business (ex: restaurants or bars needing a liquor license)
  • Professional licenses for individuals
  • Sales tax numbers

To research specific requirements for your business, refer to your state’s Department of Corporations website.

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