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The articles of incorporation set forth basic information about your new for-profit corporation as required by your state. The following guidelines will be helpful to you as you complete this important document to bring your business into existence.
(Note that depending on the state, this document may also be known as the certificate of incorporation, certificate of formation, or corporate charter.)
This section specifies your exact proposed corporate name. Include exact spelling, punctuation, and an appropriate entity identifier such as "Co." or "Inc."
In most states, you may search online to determine if your desired corporation name is available. It is helpful to conduct a search for your new for-profit corporation's proposed business name. This ensures that your corporation's name is unique and will not be confused with other similarly named businesses.
For the corporate address, enter the address of the corporation's office. This is generally within the state of incorporation. Do not use a post office box (P.O. Box) address.
If the corporation's initial and physical address is not where the corporation wants to receive mail, then add a different mailing address. This may be a P.O. Box address.
(Note, this section only applies to corporations being formed in one of the following states: Arizona, California, Delaware, Georgia, Illinois, Kansas, Maryland, Missouri, Montana, Nevada, Rhode Island, South Carolina, Texas, Vermont, Wisconsin, and Wyoming.)
These states permit two types of for-profit corporations. One is the "standard" or general corporation with all the familiar formalities such as required annual meetings and management by the board of directors. Following these formalities allows shareholders' liabilities toward the corporation to be limited to only their direct investment in the company.
The other type of for-profit corporation is a statutorily close corporation. State law allows the close corporation to operate with less corporate formalities, such as being managed by shareholders instead of directors and eliminating regular meetings.
Close corporations do have certain limitations, including restrictions on the number of shareholders, restrictions on transfer of stock, and a lack of formalities that may make traditional funding sources (such as banks) slightly weary of lending to the close corporation.
Indicate the corporation type that is suitable for your business. Consult an attorney in your state for more details on the corporation type distinction if necessary.
The business purpose describes the activities that the corporation will conduct at the time of the initial filing. The corporation's purpose and activities may change at a later date. However, an initial description must be provided.
The purpose description may be extremely broad and general. The default general purpose description is that a corporation may conduct any lawful activities. You may also choose to add a specific business purpose.
For example, a corporation that creates and hosts websites may have a specific purpose such as, "To register domains and create, design, host, and maintain commercial websites for customers." The document will still retain the general language that the corporation may engage in any lawful activities. This ensures that the company does not unnecessarily limit its activities and options in the future.
One of the best features of a corporation is its ability to exist in perpetuity. Theoretically, a corporation may remain in existence forever. Since most corporations do not have an end date in mind when the corporation is established, most corporations choose their duration to be "perpetual."
If, for any reason, your corporation is established for a fixed duration, then you may indicate your desired end date or the number of years of existence in this section.
A registered agent is also known as a "statutory agent." This may be an individual or a business entity residing within the corporation's registered state. The registered agent is statutorily responsible for ensuring reliable communication between the state and the corporation by receiving and forwarding service of process, such as lawsuits, legal documents, notices, or demands, on to the corporation. It is important to note that a corporation may appoint a director or officer of the corporation as its registered agent, but the corporation itself may not act as its own registered agent.
It is mandatory that every corporation provide the registered agent's full name. If the registered agent is a business entity, you should include the entity designation of the business, such as "Inc." or "Co."
It is also mandatory that every corporation provide the address where the registered agent is required to receive the corporation's legal correspondence. As this address is generally public information maintained by the state and available to the public, for confidentiality purposes the corporation and registered agent may consider using a business entity's physical address rather than a residential or private address of an individual affiliated with the corporation. LegalNature provides the registered agent with the option to use the corporation's physical address, the corporation's mailing address, or any other address where the registered agent is willing and able to receive mail for the corporation.
To ensure that the registered agent understands his or her responsibilities and to confirm this understanding to the state, the corporation may include a Consent of Registered Agent form for the registered agent to execute. The form is only mandatory in Louisiana, Pennsylvania, Texas, and Wyoming. It states that the registered agent agrees to become a registered agent for the corporation, to receive service of process and forward such correspondence to the corporation, and to update the state should the registered agent resign or be replaced.
As states move forward to update their procedures and systems to accommodate new forms of communication such as electronic mail, it may be useful to include your corporation's email address as an optional communication channel. As states maintain their documents and contact addresses differently—some of which may be or become public information—the corporation may consider using a business email address instead of the personal email address of an individual affiliated with the corporation for privacy purposes.
Corporations are owned by their shareholders and each share is a unit of ownership in the corporation. Shares with the same rights, privileges, limitations, and restrictions are in the same class of shares.
Shares may be assigned a par value or have no par value. Par value is a nominal value of the original cost of a share. For example, corporations commonly assign "$0.01" or "$0.001" as par value for their shares.
For the purposes of satisfying state law, every for-profit corporation must decide the number of share classes, the shares within each class, and the par value, if any, of each share per share class that the corporation will be authorized to issue. The authorized share number is the maximum number of shares that a corporation is legally permitted to issue, although the corporation does not have to actually issue any of the shares it is authorized to issue. The authorized share number cannot be zero and may be increased at a later date by amending the document.
Most for-profit corporations initially establish only one class of shares. This basic one-share class structure is easy to establish and meets most corporations' initial demands. States only require information on the number and par value, if any, of the shares authorized.
If your corporation has more than one share class, then for each share class enter the share class name; the number of shares authorized for issuance within the share class; the par value for a share within the share class; and the rights, preferences, privileges, and restrictions to the share class. A popular multi-share class structure is used to establish two classes: a common stock class and a preferred stock class. In addition to the different class names, the preferred stock class may have different rights, preferences, privileges, and restrictions. For example, your preferred stock class may have a guaranteed dividend distribution right when common stock class does not have any dividend distribution right. Be concise and enter as much of these distinguishing rights, preferences, privileges, and restrictions for each share class as needed to differentiate the classes.
When completing the authorized shares for a Connecticut corporation, the corporation should be aware that the minimum franchise tax that a corporation must pay authorizes 20,000 shares or fewer upon incorporation. If a corporation wishes to issue more than 20,000 shares, it must pay a franchise tax calculated on a sliding scale. This may be found at the Secretary of State's website.
KRS 136.060 requires every corporation to pay an organization tax based on the number of shares authorized in the articles of incorporation. The minimum organization fee for 1,000 shares or fewer is $10.00. If the corporation authorizes more than 1,000 shares, contact the Secretary of State's Office at 502-564-3490 for an accurate computation of the corporation's Organization Tax Fee.
Maryland assesses a minimum "Organization & Capitalization Fee" of $20.00 on corporations with total par value under $100,000.00 or with more than 5,000 shares of no par value stock. If the corporation authorizes stocks that exceed these amounts, contact Maryland's State Department of Assessments & Taxation at (410) 767-1340 for an accurate computation of the corporation's organization and capitalization fee.
Massachusetts' minimum filing fee is $275.00 based on 275,000 authorized shares plus $100.00 for each additional 100,000 shares or any fraction thereof. If the corporation authorizes share numbers that exceed 275,000, then the organization filing fee increases as well.
Michigan assesses a minimum "Organization Fee" based on the number of authorized shares. The fee structure is as follows and should be kept in mind when deciding the number of shares the corporation should authorize in its articles of incorporation:
Missouri assesses its filing fees based on the dollar amount of authorized capital. The filing fee is $58.00 for up to 30,000 shares or the par value up to $30,000.00. For every 10,000 shares that exceed 30,000 shares or for every $10,000.00 par value authorized shares that exceed $30,000.00, there is an additional $5.00 filing fee. For example, if a corporation authorizes 50,000 shares in its articles of incorporation, then the corporation's filing fee would be $58.00 + $10.00 = $68.00.
Nebraska's filing fee is assessed based on the amount of authorized capital stock and length of the articles of incorporation, measured in pages.
Nevada's filing fee is assessed based on the value of the total number of authorized shares stated in the articles of incorporation.
New Mexico's filing fee is assessed based on the total number of authorized shares stated in the articles of incorporation. The filing fee rate is one dollar for each 1,000 shares, but in no case will the filing fee be less than $100.00 nor more than $1,000.00.
New York assesses a minimum tax of $10.00 on shares that the corporation is authorized to issue. The $10.00 tax authorizes the corporation to issue a maximum of 200 shares with no par value or a par value of all authorized shares up to $20,000. Corporations wishing to be authorized to issue more than 200 shares with no par value or par value shares totaling more than $20,000 will incur a tax of more than $10.00. The tax rate is 5 cents per share of no par value stock and 1/20 of one percent (.05%) of the par value of the shares that have a stated par value.
Oklahoma assesses a minimum filing fee of $50.00 for total authorized capital that is $50,000 or less. Total authorized capital is derived by multiplying the number of authorized shares by the par value of each share. If the total authorized capital for the corporation is greater than $50,000, then the fee is $1.00 per $1,000 authorized capital value.
For the purposes of calculating total authorized capital, a no par value stock is valued at $50.00 per share for determining fees only. This effectively means $50.00 is the minimum filing fee for corporations authorizing fewer than 1,000 shares of no par value stock. For a number of shares greater than 1,000, the fee is $1.00 per 20 no par value shares.
Rhode Island assesses a minimum filing fee of $230.00 for fewer than 75,000,000 shares of authorized stock and one-fifth cent per share of each authorized share for 75,000,000 shares or greater.
The charter fee and annual registration fee in Virginia are based on the number of authorized shares. For the charter fee that must be paid upon filing the articles of incorporation, the minimum fee is $50.00 for up to 25,000 shares. Consult the Charter Fee/Entrance Fee Schedule for more exact fees.
Here you enter the initial number of directors. This number may be changed in the corporate bylaws. This is an optional requirement in most states except for Maryland.
Provide the name and address of each initial director. As with the registered agent's address, which may be or become public information, the directors may consider using a business address rather than a residential or private address for privacy purposes. Do not provide social security numbers, dates of birth, or other private identification information.
One of the main reasons business owners choose to form a for-profit corporation is to receive liability protection. Directors and officers of a corporation typically are not personally liable for monetary damage, even if their corporate decisions, acts, or omissions turn out to be bad business decisions in hindsight. The rationale is generally to encourage corporate directors and officers to take action and make business judgments to the best of their ability and without fear of personal liability at a later date. If the corporation elects to allow such liability protection for its directors and officers, indicate the corporation will provide the maximum personal liability protection allowable by law.
Corporations may elect to change the typical liability protection for its directors and officers in the document. You may choose your own liability protection restrictions for the directors and officers and enter your restrictions in complete sentences. For example, you may specify that "Officers are liable for damages resulting from failure to disclose any potential conflict of interest."
You may also eliminate all personal liability protection for corporate directors and officers.
Add any additional terms that have not already been addressed in your document. Use complete sentences, and remember that your document does not need to be long or complicated—it just needs to satisfy state requirements.
An incorporator is a person, or business entity if permitted in your state, that prepares, files, and verifies the truth and accuracy of the document, and signs it. In essence, the incorporator sets up the corporation by creating its formation documents with the state.
List each and every incorporator with their full name and address. As the incorporator's address may be or become public information, the incorporators may consider using a business address rather than a residential or private address to protect their privacy. Every listed incorporator must sign.
A notary acknowledgment is used to verify the identity of someone signing a document. The notary acknowledgment is optional for most states. The acknowledgment is absolutely required when incorporating in Louisiana. If incorporating in Louisiana, print a copy of the page entitled "Notary Acknowledgment" for each incorporator signing the document.
As opposed to other types of business entities, a corporation has a separate and distinct legal existence from its owners. The law treats corporations as if they are people, allowing them to take on liabilities, enter into contracts, sue and be sued in their own names, and pay taxes separately from their owners, which are called shareholders.
Because of this trait, corporations may continue in existence indefinitely. Therefore, corporations only end when they are legally dissolved under state law, not when the owners change or die.
The last important characteristic of corporations is that their owners have limited liability. This means that the owners may not be held personally liable for their company’s debts unless they agree. Instead, the corporation itself is responsible for repaying debts as well as paying off any legal judgments that may be awarded against it.
The first step to legally form a corporation is filing the articles of incorporation with the office responsible for business filings (usually the Secretary of State’s Office) in the state where you wish to form the company. In some states, this document is known as a certificate of formation or certificate of incorporation.
To complete the articles of incorporation, you will need to pay a fee, normally $100–$500, depending upon the type of corporate entity you are forming. You will also need to include the following information with your articles:
Lastly, state law requires that your company follow certain corporate formalities. Most states require that companies create a set of corporate bylaws that set forth the general management structure of the company as well as broad procedures of corporate governance. Also, states typically require that the company hold an initial meeting of the board of directors in order to show that the company is formally initiated to conduct business.
Other required corporate formalities vary from state to state. You can find the particulars for your state by visiting your Secretary of State’s Office or a similar corporate governance website provided by your state of incorporation.
Yes, single-owner corporations are allowed. However, be aware that regardless of the number of shareholders, the legal requirements placed upon corporations do not change. This means that as a single shareholder, you will still be required to hold and keep evidence of annual shareholders' meetings as well as keep in place company bylaws and issue stock certificates.
A corporation is its own entity so it files its own taxes. Therefore, unlike an LLC, the corporation’s taxes are in no way connected to the shareholders. Even though the formalities of starting and maintaining a corporation are more stringent, the tax benefits to corporations are greater. The tax rates for corporations are set by Congress and usually change less frequently and are lower than personal levels of tax. Also, with comprehensive tax planning, greater savings can be achieved.
As a corporation is an independent legal entity, shareholders can become employees of the corporation whereas with LLCs, members cannot be considered employees and do not receive W-2 salaries. Shareholder employees of corporations are expected to receive a reasonable salary that will be taxed like any normal employee.
Both C corps and S corps are common corporate structures, with a C corp being the most common corporate entity. An S corp is a corporate entity that has elected to use a special tax status. In fact, the term “S corporation” is derived from Subchapter S of the IRC.
The main differences between a C corp and an S corp are as follows:
The main consideration regarding taxes is that an S corp is treated as a pass-through entity, avoiding the double taxation that occurs with a C corp. With the traditional C corp setup, both the corporation and corporate shareholders are taxed on profits. However, pass-through taxation allows for the corporate entity to pass on all profits to its shareholders, making shareholders individually responsible for paying for business profits on their personal tax returns.
Due to the lenient tax arrangements of an S corp, company ownership is highly regulated. For instance, a shareholder must either be a US citizen or a resident alien. Also, a shareholder must be an individual and cannot be another corporate entity. Whereas a C corp may have unlimited shareholders, an S corp is restricted to 100 shareholders and therefore is better suited for smaller businesses.
A C corp can issue multiple classes of stock, which will determine ownership rights. An S corp is limited to only issuing one class of stock, ensuring that all members are taxed in the same manner.
Unlike a C corp which can deduct costs for employee benefits, shareholders who are employed by an S corp and own over 2% of the company are not allowed to deduct the costs of any benefits.
Pass-through tax refers to tax arrangements permitted to sole proprietorships, partnerships, and S corps. Under this arrangement, businesses are not directly taxed at the federal level; instead, all profits are “passed through” to the shareholders. Shareholders then pay taxes on a personal basis. Pass-through tax arrangements reduce the overall tax burden on the shareholder due to the corporation not paying income tax, therefore increasing the amount of profit given to the shareholders.
In short, yes. All corporations are required by state law to hold at least one annual shareholders' meeting in order to elect a board of directors and conduct any other regular business. The requirements for any other meetings would be specific to an individual corporation as specified in the corporate bylaws. In addition to holding an annual meeting, state law also requires that this meeting is documented with meeting minutes.
In regard to board of directors' meetings, there are not any state requirements for how frequently these meetings should be held. However, since the purpose of a board of directors is to manage the corporation’s needs, these meetings should be held as and when is necessary in accordance with the corporate bylaws.
An S corp is required by state law to hold at least one annual shareholders' meeting. The purpose of this meeting is to elect a board of directors to handle the day-to-day running of the corporation and to settle any required corporate business. Although state law only requires one annual meeting, it is important to check the company bylaws as there may be self-imposed requirements to hold further meetings.
A corporate seal is a tool used to emboss or stamp the company’s signature on documents therefore showing the company’s approval and agreement to the contents. The corporate seal usually contains its name, date, and place of incorporation and is normally held by the company secretary.
In most states, a corporate seal is no longer required and does not have any significant legal meaning as the distinction between sealed and unsealed documents has been abolished.
Unlike S corps which allow pass-through taxation, C corps are traditional entities that are taxed at the corporate level. This means that any profits realized by the C corp are taxed, and then any profit distributions to the shareholders are then taxed on a personal level.
Although double taxation may seem like a burden, C corps do have their advantages. In general, corporate tax rates tend to be lower than personal tax rates. Also, C corps are capable of retaining profits instead of being required to pass them on to shareholders.
Like partnerships, S corps are pass-through entities. This means that there are no federal taxes levied upon the corporation. Instead, the S corp passes on all profits directly to the shareholders, and then the shareholders are responsible for paying their own tax.
Although there is not tax levied at the federal level, each state has its own rules for how S corps are taxed. For example, in California, S corps are taxed at 1.5%, whereas in New York, S corps are required to pay the full tax rate of 8.85%.
Even though shareholders are responsible for their own tax on profits, any shareholder that is employed by the S corp is required to receive a “reasonable salary.” The salary is subject to normal employment taxes and withholdings. What is considered a “reasonable salary” is a widely debated topic that does not have a clear answer. Salary paid to shareholder employees should be comparable to their duties and responsibilities, and should also take into consideration average market salaries. Small salaries with large profit distributions are likely to catch the attention of the IRS.
Although Delaware is by far the most chosen state for business incorporation, Nevada has surged in popularity by introducing corporation-friendly rules.
The top benefits for incorporating are as follows:
Corporate officers and shareholders are not required to be residents; however, be aware that the benefits of registering in another state may be outweighed by the pitfalls. If your corporation will be doing business in your physical state, then you will be considered a “foreign” entity. In order to be able to conduct business in another state, you will need to complete the foreign qualification procedure. Once qualified, the state you are doing business in may require you to pay additional taxes or follow further guidelines.
A registered agent is the person responsible for receiving service of process for the corporation. All corporations must have a registered agent available during regular business hours in their state of incorporation to receive court summons and other legal notices.
You can choose to either act as your own registered agent or hire a third-party service to act on the corporation’s behalf. Each option has its pros and cons; for example, being your own registered agent is less expensive, whereas a typical third-party service costs between $150.00 and $300.00 per year. One of the drawbacks of acting as your own registered agent is that you could be served with lawsuits in front of employees and customers, which may be damaging to your reputation.
Despite its size, Delaware has a huge reputation for having created a business-friendly environment for corporations. The years of favorable treatment have created a large body of statutory and case law providing many protections for business owners and a level of predictability that makes many investors see the state as a major benefit.
Delaware has a separate court, called the Court of Chancery, which only hears corporate law cases. Because the judges are so well versed in such issues, they can often decide cases quickly, without the need for a jury. This can go a long way to saving valuable time and legal expenses.
Delaware also does not collect taxes from businesses that do not transact business within the state and does not tax royalty payments or intangible assets. It also does not collect state or local sales taxes on businesses that do operate within the state, but does tax gross receipts on sellers of goods and providers of services. These policies as a whole may result in significant tax savings for some businesses.
Note that if you incorporate in Delaware and it is not your home state, then you will still be required to pay an annual franchise tax based on the value of the corporation. You will also still be subject to your home state’s annual reporting requirements in addition to fulfilling Delaware’s reporting requirements.
You need to register a fictitious business name (also called a trade name, DBA name, or assumed name) whenever you are doing business under a different name than your personal name, the names of partners in a partnership, or the registered name of an LLC or corporation. When you form a sole proprietorship or partnership, the name of the business defaults to the name or names of the owners unless you register a new one.
For example, if Linda Clark owns a home cleaning business and wants to call it "Linda Clark Home Cleaning," then she must file a form with the appropriate office, usually the Secretary of State's Office or the County Clerk's Office.
Note: A few states do not require businesses to file DBA names.
Starting a new business is an exciting challenge. In order to get off to a good start, you will need to think about the following issues:
Once you have gone through this checklist, it will be easier for you to determine which business entity is the right one for your new business.
Business formation is an umbrella term for several different ways of legally structuring a business. They include becoming a limited liability company (LLC), partnership, C corporation, S corporation, cooperative, or nonprofit (known as 501(c)(3)).
The right legal structure for your business is one of many things that are important to consider before starting your business. Carefully consider the pros and cons of each business entity to determine which features best meet your needs.
Selecting a business structure is not a permanent decision. As a business matures, ownership may change the legal structure. For example, some small businesses begin as sole proprietorships and then grow into LLCs.
Business formation is sometimes referred to as "incorporation." However, since "incorporation" may be associated with forming a corporation, it is better to use the term "formation."
The business entity is the foundation of the business in the same way that the frame is the foundation of the house. If the foundation is shaky or cuts corners, it will inevitably affect the business down the line.
Selecting a legal structure for your business defines the company legally and strategically. You also need to select a legal structure for your business in order to comply with the law in your state. Each type of business entity has its own paperwork requirements, tax ramifications, personal asset protections, and costs.
When determining which business entity is right for your business, you should look at how the entity will impact taxes, liability, management, continuity, transferability of ownership interests, and formality of operation.
Generally, most businesses use one of the following forms: sole proprietorship, partnership, corporation, limited liability company (LLC), or >nonprofit.
Yes. Many people are running businesses based entirely online. This provides entrepreneurs with the opportunity to make money with little to no overhead, a faster way to get up and running, and the chance to operate all over the world. However, online businesses should still create a legal structure. Failing to consider business formation is one of the major mistakes online businesses fall prey to.
To form a corporation, you are required to complete the articles of incorporation and file it with the Secretary of State where the business is located. Some states call this document the certificate of incorporation.
Once you have legally incorporated, there are optional documents that can help govern your business. The most important governing documents are meeting minutes, bylaws, and shareholder agreements.
When you hold meetings of the board of directors, you should keep minutes of the board of directors.
Bylaws set forth the basic rules and procedures for running the corporation.
A shareholder agreement is a binding agreement between shareholders that defines their rights and obligations. Although this is an optional document, it will outline each shareholder’s distribution rights, voting rights, management rights and responsibilities, and more.
Since corporations have shareholders, you should keep records demonstrating the number of shares owned by each person or entity. A stock certificate records issuance of stock to shareholders, who may then use the certificates as evidence of stock ownership.
Apply for an Employer Identification Number by completing IRS Form SS4 or by applying online.
In a sole proprietorship or general partnership, all of a person's personal assets (such as real estate, vehicles, personal property, and savings accounts) may be at risk if the business is sued. In a lawsuit, a person may seek money damages in a court action against you.
Under a limited liability company (LLC) or a corporate entity, your personal assets are shielded. This is called “limited liability.” If the LLC or corporation is properly maintained, then most personal assets are protected, even if there is an injury or other problem at the company that leads to a lawsuit. Limited liability protection extends to acts or omissions of a company's employees.
The simplest entity is the sole proprietorship. In a sole proprietorship, a single person engages in business activity without much formal organization. Even in a sole proprietorship, some documents must be completed in order to operate legally. For example, if the business is conducted under a fictitious name (i.e. not in the name of the owner), then you must file a certificate with the County Clerk in the county where the business is maintained. This is known as a trade name or a DBA (“doing business as”).
As you complete your articles of incorporation, you will need to provide certain relevant information. This includes the name and address of the company, director names and addresses, and the federal tax ID number (EIN), if available. You may also need to know the par value and classes of shares offered.
Use the information you collected to complete your articles. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.
It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard. The incorporator will sign the articles, and the registered agent signs the Consent of Registered Agent, if required.
Your articles of incorporation must be filed and approved with your state. You must include a filing fee and any other documentation required by your state office.
Once your articles have been approved, you should store your approved articles in your corporate records book. Many states also make a copy of the articles available online. Be sure that you store your records in a safe location. It is a good idea to keep both physical and electronic copies. The following documents should be stored in your corporate records book:
Corporate bylaws are a set of rules and procedures used to determine how a corporation will be run. Required in most states and recommended in all, corporate bylaws is an internal document that facilitates the smooth operation of your new corporation. Bylaws do not need to be filed with the state but are fundamental to a corporation and should be one of the first documents created by a corporation.
Every company with more than one shareholder should have a shareholder agreement to ensure that all shareholders are treated fairly and are aware of each other's management authority as well as rights, duties, and responsibilities toward the corporation and toward each other. Shareholder agreements work in conjunction with your articles but provide many important additional protections. Despite your good intentions, it is all too common for conflicts to arise down the road when no agreement is in place. What happens with the shares when one shareholder dies or when shareholders want to sell their shares? These and a multitude of other potential issues can be cleanly resolved and clarified by having a shareholder agreement securely in place.
The first board of directors' or shareholders' meeting is where fundamental decisions about the corporation are made. For example, this is where the bylaws may be adopted; officers may be appointed; tax selection of the corporation may be approved; directions may be given to directors or officers; and authority to open bank accounts, enter into contracts, or incur other expenses may be approved. Any corporate resolutions passed at the first meeting must be recorded in a corporate resolution form.
Your company will be officially formed and open to conduct business only after you successfully file your articles AND hold your first board meeting formally passing a resolution to initiate operations.
Prior to the meeting, a notice of meeting should be sent to relevant parties. If no notice for the meeting was given, a waiver of notice should be signed at the meeting. The meeting details must be documented by a party designated as the meeting secretary in the meeting minutes.
If a resolution to issue stock was passed at the first meeting, you will need a stock certificate to formally issue the stocks and a stock transfer ledger to record the transactions for corporate records.
Your corporation's business and purpose may require business licenses from your city, county, or state. For example, hair salons generally require city or state permits. Consult your local government's business bureaus to confirm whether you need a license or permit for your business and how to obtain them if necessary.
Satisfying State Reporting and Tax Requirements
Corporations are subject to state tax. For some states, the tax rate is based on the entity designation. For others, the tax rate may be based on the number of shares authorized for the corporation or the income derived from the corporation. For example, a California corporation is taxed at a minimum tax rate regardless of the corporation's profitability, plus additional taxes if the corporation reaches certain income thresholds. Consult your state agency to satisfy your state's tax requirements accurately and in a timely manner.
Certain states also require reporting on a regular basis, such as annual or biennial reports. This requires a corporation to update the state on any changes in the corporation, and sometimes requires the corporation to disclose certain information regarding the corporation's operations in the past year. For example, in Illinois, the corporation must file an Annual Report that includes questions about the corporation's assets and share distribution. In California, on the other hand, a corporation merely has to file a Statement of Information requiring the corporation to update the state with basic corporate contact information and director information if it differs from the previous year. Consult your state agency to satisfy the state's reporting and filing requirements.
Apply for a federal employer identification number (EIN) with the Internal Revenue Service (IRS). This is also known as your corporation's Federal Tax Identification Number and is used to identify a business entity for tax and hiring purposes.
Corporations are automatically classified as C corporations for tax purposes. This is the standard corporate tax treatment where the corporation is recognized as a separate taxpaying entity from the shareholders. Under this tax structure, a C corporation pays taxes on its profit. If the C corporation distributes any net profit to its shareholders in the form of dividends, the shareholders are taxed again on their individual income, separate from the corporation's tax obligations. Thus, the net profit of the corporation is taxed twice.
A corporation may choose to opt out of the standard C corporation tax treatment and elect the S corporation tax treatment to avoid being taxed twice if it is a qualifying corporation. An S corporation may pass its income, losses, deductions, and credits directly to the shareholders for federal tax purposes.
To qualify for S corporation status and tax treatment, the corporation must be a domestic corporation; have shareholders who are not partnerships, corporations, or non-resident aliens; have fewer than 100 shareholders in the company; have only one class of stock; and must not be an ineligible corporation (such as certain financial institutions, insurance companies, and domestic international sales corporations). If your corporation qualifies for S corporation tax status, file IRS's Form 2553 Election by a Small Business Corporation within two months and 15 days after the corporation's first tax year.