Making your business a corporation or LLC has many advantages. The primary advantage is that doing so separates your business assets from your personal assets, even if you remain the single owner of the company.
A corporation or LLC is defined as a legal entity, distinct from its owner(s). Because a corporation has most of the same rights and responsibilities as an individual, it is sometimes referred to as a “legal person.”
Although federal law creates minimum standards for trading company shares and governance rights, each state has its own laws in regard to incorporation. Therefore, when you are forming a corporation or LLC, the entity must be created within the state and must meet that state’s incorporation requirements.
While you may have read online that you can form a corporation without a knowledgeable attorney, don’t be fooled.
If you want to incorporate properly — without mistakes that will undoubtedly haunt you in the future — it is essential to have an experienced, corporate law attorney to assist you in this complicated process.
Benefits of Forming a corporation or LLC include:
- Gaining tax breaks (e.g. writing off health insurance premiums, life insurance)
- Securing assets
- Limiting liability protection so that, for example, your home cannot be seized to pay your business debts
- Creating an ongoing business entity that potentially will live on when you die
- Facilitating transfers of funds
- Gaining the ability to sell stock to raise capital
- Making it easier to establish retirement funds and plans like 401ks
With all of these potential advantages, it is no wonder so many companies incorporate it. This article is designed to give you an understanding of the steps that have to be taken in the incorporation process.
Which is better — a C or an S corporation?
C and S corporations are named for the part of the federal tax code that applies to each. The chief advantage of the S code is that it permits pass-through taxation, which avoids the double taxation of the C corporation structure. Not all corporations can reap the benefits, though.
In order to create an S corporation, your business must meet the following requirements:
- It must be based in the United States and filed as a U.S. corporation
- It must maintain no more than 100 shareholders
- Its shareholders must each have a Social Security Number and give written consent to the election of the S corporation
- It may issue only one kind of stock
Your corporate attorney will help to explain the prerequisites and pros and cons of C and S corporations and which structure will work in your best interests. You should be aware that you can switch your status with little trouble if you decide to.
Choosing a corporate name
In order to create the “legal person” of a corporation or LLC, you must give that person a name, such as “Incorporated,” “Corporation,” “Company,” or “Limited.” Your choice is restricted only in that the name you choose must be distinguishable from all other businesses on file.
Exceptions may be made if your company is in a different state or if your company deals with an entirely different enterprise. For example, you may be able to get away with naming an ice cream company with the same name as a shoe manufacturer.
Nonetheless, your corporate attorney will no doubt recommend that you do your due diligence in researching to make sure that your corporation name will be unique. Sometimes this can be accomplished by simply adding an initial or subtracting a single word.
Having a dedicated lawyer to protect you from violating the law in this first big decision can be extremely reassuring.
Preparing and filing Articles of Incorporation
In order to incorporate, your attorney will assist you in filing the Articles of Incorporation in the state you desire. These articles have to:
- State your corporate name and address
- Include the name, address, and signature of the agent for the process service
- Include the name and address of each incorporator
- Indicate the nature of the business
- Provide the number of shares the corporation or LLC is authorized to issue
- State the date the articles will become effective
There may also be tax forms required when you file articles of incorporation in your state. For example, in South Carolina, Form CL-1 Initial Annual Report of Corporations must be submitted by both domestic and foreign corporations to the South Carolina Secretary of State.
Appointing a registered agent
Every state in the U.S. requires all corporations, limited liability companies (LLCs), and partnerships to have registered agents, though the name of such parties may differ from one state to another (e.g. “resident agent,” “statutory agent,” “agent for service of process”).
Regardless of the name, this agent is an individual or corporation that agrees to accept legal papers on the corporation’s behalf if it is being sued by another company. The registered agent must have a physical street address and agree to accept process service on your LLC or corporation’s behalf.
Setting up an LLC corporate records book
When establishing any new system, it is important to create a method for recording and organizing records. This is certainly true when incorporating it.
An accomplished corporate attorney will assist you in creating a corporate records book that will have appropriate sections for minutes of director and shareholder meetings, stock certificates, and stock certificate stubs. This corporate records book should remain in the main office of your LLC or corporation.
Creating corporate bylaws
Although not required by federal or state law, creating bylaws is an integral part of forming a corporation. As any reliable corporate attorney will tell you, without bylaws, your corporation will not be well-grounded.
These basic rules of operation, though they do not have to be filed with the government, are vital to the efficient working of your company.
They also serve an important purpose by establishing your corporation’s legitimacy to the IRS, banks, and creditors.
Appointing initial corporate directors
Whether your LLC company is small or large, you, as an incorporator, must appoint initial corporate directors who will serve on the board until the first annual meeting of shareholders. At that time, the board members who will serve will be elected by shareholders.
Holding the first board of directors meeting
During the first meeting of the LLC or corporation’s board of directors, the directors should:
- Appoint corporate officers
- Adopt bylaws
- Select a corporate bank
- Issue shares of stock
- Set the parameters of the corporation’s fiscal year
- Adopt an official stock certificate; form a corporate seal
- If necessary, approve the election of an S corporation status
The minutes of the meeting should be taken and sent to all directors for signed approval within a week or two.
While most states do not legally require stock certificates, paper stock certificates are typically issued. There are complexities involved in issuing stock certificates from which most small corporations are exempt.
Nevertheless, it is important to have your corporate attorney make certain that your company is working within guidelines pertaining to your particular corporation and your particular state.
SEC exemptions are a specialized area of corporation law so you will be grateful to have a corporate attorney to provide you with a comprehensive understanding of these matters.
Complying with other tax and regulatory requirements
In addition to all of the above-mentioned steps necessary to form a corporation, you must:
- Obtain a federal employer identification number (EIN)
- File the necessary form to elect an S corporation status if so desired
- Obtain any other necessary local and state business licenses*
* such as for regulated industries or fictitious business names (pseudonyms)
Filing to do work outside your home state
Failing to do this may result in penalty fees. Your corporate attorney is the best person to advise you about precisely how to best protect your interests if you do intrastate or interstate business.
Make sure to have a legal backup to ensure that everything goes smoothly
Forming a corporation or LLC is a big step that will help to shape your future. Don’t take it without getting the advice of legal professionals with a history of success.
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Robert Moore is a member of the team of attorneys at Willcox, Buyck & Williams, PA, a law firm in South Carolina serving areas surrounding Florence and Myrtle Beach in Employment Law, Business Law, Litigation, Estate Planning, Real Estate, and Federal Criminal Defense. We help clients in all aspects of business, including startups, various types of business structures, transactions, and employment law.