Corporation vs. Incorporation

2) Commonly Asked Questions

Now that we have the basic definitions down let’s take a look at some commonly asked questions about the differences between corporation and incorporation.

What is the foremost advantage of starting a Series LLC or LLC?

These unincorporated business entities are seen to have more autonomy and independence in the way they manage their businesses. LLC owners can choose how to have their business taxed, for example.

How can we compare a corporation to an inc. or incorporation to a corp.? And: what are the main comparison points between corporation and inc.?

We know these concepts can be tricky, but you’ll be happy to know this is an easy answer. Corp. and inc. are simply suffixes. When you name your business, you are free to use one of these. Many businesses use “inc.” and we are sure you can quickly think of a few, such as Amazon.com Inc. Others have decided to go with including “corp.” in their name, with one of the famous being Microsoft Corp.

Do you understand the difference between a corporation and an inc? Or are you still a bit confused?

Think of the words themselves: Inc. or Corp. just imply that your company is incorporated! Now, you should understand the fundamental difference between inc. and corporation.

What is the process of creating an LLC?

Creating your own LLC is an exciting process with a few main pieces you will want to make a note of. Let’s break it down:

• Choose a name ending in the words LLC (with or without the punctuation); you can also use the entire phrase without abbreviating
• Get in touch with an agent who is registered. This Registered Agent proceeds to file the correct forms required by your state for a fee
• Obtain your Formation Certificate after it is approved by your state

Have I heard it may be necessary to incorporate two different times?

Fortunately, you will not have to incorporate your business twice. If and when you do need to conduct business in another state, you will simply do what is called “going on-record” in the additional state or states. For example, if you register your company in California and want to do business in Utah, you will need to proceed in Utah on record, but you can use the same LLC that you created in your home state of California.

Some business owners select their state of incorporation based on the most affordable rates and fees and then conduct business in several different states. They do this because your business is perpetually governed by the state in which you incorporated, and not the state or states where you also conduct business.

After I incorporate my business in California, does my business need an Authority Certificate?

This certificate is only needed if you plan to do business out-of-state. For example, if you started your company in a different state but then wanted to come to California to do business, you would need to procure this certificate. It would also allow you to:

• Start a job or sign a new contract in a different state
• Open an office in a different state
• Take on an employee from a different state

If you are incorporating your business in California and doing business in California, you will not need to worry about this, at least not yet. But keep in mind that it will be smart to pay attention to the requirements of your company’s banks, the rules of your vendors, and other licensing regulations, especially when you want to expand your business to another state.

When is a certificate of authority necessary?

The most common reasons businesses need to apply for this certificate are as follows:

• If you desire to open an office in a different state
• If you plan to hire an individual from another state
• Prior to starting a job or contract in another state
• Officially required by a vendor, bank, or different involved party
• Required by licensing board or authority

Tip: When we use the term “foreign” in this context, as in ‘foreign state,’ we do not mean international. We simply mean a state different than the place where you incorporated.

Is it possible to incorporate my business in many different states and begin that way?

We strongly recommend that you incorporate in a single state and one state only. While it is true that some companies eventually create multiple entities, this should only be done if the business possesses subsidiaries.

What exactly is a subsidiary in this context?

For corporations, subsidiaries are simply companies that belong to other companies. You’ve heard the terms ‘parent company’ or ‘holding company,’ right? Normally, when one company controls another, the parent company holds a percentage of its stock (usually more than half).

In any case, incorporating your company in more than one state would create legal problems, for example, deciding which business would possess the most assets. It can also cost the business owner money, between more filing of paperwork and additional business costs.

We do not recommend this because it can create an unstable situation, as businesses in different states sign different documents, and employees can also become uncertain as to where their allegiance lies.

Each state has different laws regarding the structure of your business, what forms you need to fill out and file, and the documents you need to hold. California is a fantastic place to start your business with its potent and steady economy, a giant population, and even temperate weather. Whatever type of company you are incorporating, we wish you luck in the Golden State.

How does one know where exactly their business has been established?

You may have heard the terms “PPB” and “nerve center” thrown around, but what do they really mean, and how do you identify where your company has actually been established?

First of all, PPB means your Principal Place where you conduct business. In other words: where is your main venue or “nerve center” primarily established, even if you have begun to conduct business elsewhere?

Here is an easy way to figure all of this out: you first incorporated your business somewhere, correct? Of course, you did. So, what state was that? If you answered California, for example, then California is considered your company’s “domestic” state. The additional 49 states that make up the U.S. are known as “foreign” states.

So, your PPB or ‘nerve center’ would be in California since you began your small business journey there. Now, as we hinted at earlier, it is not recommended that you re-incorporate in any of these other states through filing additional certificates or articles. Why?

Think about it: you would then be the owner of numerous companies, all sharing an identical name. Sounds problematic, correct?

So, what do you do? Take your company on record whenever you are outside the state. If you are in California, but you find that conducting business in Oregon or Nevada, even Arizona, is profitable, your business will be on-record in these foreign states. Even if you set up offices in these other states, the structure of your business will stay the same.

Why do they say “foreign” when I am still in the United States? What’s my primary place of business?

Just like any other field, there are a plethora of business terms, such as “on-record” or “foreign,” that can seem confusing. But when you break these terms down and place them into context, they really are not so bad. It is all about being able to define your terms and not become caught up in the business jargon. Before you know it, as a business owner, you will be using these terms, too!

But there are some companies that run their businesses from multiple locations, correct?

Yes, absolutely! Let’s get back to some of the jargon we have been using but perhaps haven’t adequately defined yet. The “nerve center” is the place in which executives and owners make important decisions and therefore run the business. Here is a new one: what is known to some as the “muscle center” is the location where the actual business processes are conducted, depending on the type of company.

What businesses normally do to figure out where their principal venue of business is, is examine both of these “centers” and decide, based on a variety of factors, the exact place the business calls home. This is known as the “test of total activities.”

Once you figure out where this specific place is, your activities there will be known as “on-record.” Why does one need to be “on-record?” All businesses must do this so that if a problem or issue occurs, such as a lawsuit or other legal action against the company, the presumed victims or wronged parties are able to find you and serve your business with official documents.

So, what is left for you to do? A business analyst or consultant or a lawyer can help you determine where exactly your small company will begin to proceed “on the record.” Doing this is not a choice; it is a necessity, and your business needs to comply with public policy. Different states enforce different penalties if you choose to ignore these regulations, so it is in your best interest to take this matter seriously.

It is true that some states may not require you to take a record of your business activities, but California does. If you would like to consult with a professional, please get in touch with our California Business Lawyers & Corporate Lawyers at Nakase Wade.

Why does this matter in legal terms, and is it really that important?

States want to understand your company’s structure and the location of your official venue. Each state has a responsibility to account for all its small and large businesses, to make sure they are all acting in accordance with state and federal laws. Therefore, all of the issues we have covered here are paramount. Think about it: you have put a lot of time, effort, and funding into all aspects of the business. You have carefully worked your way through each step, and that is admirable. Do not squander it all by not paying attention to these terms.

There does not seem to be any concrete purpose to these regulations and rules. Is there?

We do not know anyone who enjoys paying fees, filling out mountains of paperwork, or navigating confounding legal regulations. However, a state’s official records are important, and making sure your company is listed in those records can help make it more available to the public.

Nearly every issue in our society comes down to the court system, correct? From local or state court to the Supreme Court, this is the way in which we make decisions and figure out complex issues of right and wrong. When you start your company, you are subject to court rulings, as is any other business. What we are pointing out here is that the court has jurisdiction over the company in two places: your principal venue of business and the state where you incorporated your company. It does not matter if the accident or controversy, or criminal act occurred in Encinitas, California, or Salt Lake City, Utah—if you are running your business in both of those places, you are subject to the court’s decision and ruling.

Now, it is important to point out that in many other states, aside from your business’ “home state,” you may only be subject to what is known as “specific jurisdiction” as opposed to your home state. So, for example, in California, you may be under “general jurisdiction,” but in Utah, perhaps your company is under “specific jurisdiction,” which oversees only the business conducted in that specific state.

Why is this system like this? States and state governments especially want to restrict what is known as “state shopping” or “forum shopping,” which can occur when business owners search out more favorable rules, regulations, and general conditions favorable to a hypothetical plaintiff in other states.

You see, setting up and maintaining a physical presence in both states where you conduct business is advantageous because it makes customers aware of how to contact you. Once you are entered into the public record of both of these states, you are official! And, you are able to be discovered and sought out by consumers. Who knows, you might find a lifelong customer or even an investor through this process.

Picture this: you establish your headquarters in one state and then also do business in another. Or, you set up your agent’s office in one state and then also branch out to an additional state. Are you beginning to see how this could be advantageous?

Filing with your state allows individuals to search out your specific company name and identify the location in which you serve you with legal papers. We know that is not as exciting as gaining new investors, but it is a part of the process.

Where does the owner register his or her company?

The debate here, it would seem, would be regarding location. The majority of U.S. states assume that the place where you conduct business is synonymous with your physical location. Generally, also assumed that your business has a “home,” and that consists of active employees, inventory, and any machinery or computing machines used to manufacture or synthesize your product, whatever it is. Although this definition may seem antiquated, we still abide by these beliefs, and going along with those characteristics is the assumption by the state that your entity is licensed with the state. Also, when you open your corporate bank account, some banks might ask you to prove the official location of your business. There are a few exceptions, and again, much of this varies state by state:

• Micro-businesses, run by one person, are not always required to fill out an authority certificate
• You may be required to qualify your business entity in additional states.

Finally, each individual state dictates unique laws concerning whether or not your business activity is substantial enough to necessitate going on record. If you only sell inventory, advertise, hire out sub-contractors, or sell services in another state, then you will not need to file.

Tip: However, if you do indeed possess an office in the state, or your employees are located there, odds are you will probably need to register.

How do I register or “qualify” in the state?

Here is what you need to do:

1. Fill out a brief application
2. Pay the correct fees
3. Submit a copy of your formation certificate

Sounds easy enough, right? These forms obviously vary across the states—a running theme here—so you will want to check in with your state, in this case, California, to see what else needs to be done. We are confident that you are now at least more familiar with the differences between corporation and incorporation, but if you have nagging questions, please let us know.

Good luck out there!

At Nakase Wade, our California Business Attorneys & Corporate Lawyers are always here to answer your questions as you navigate through the important steps to starting your new company. We know that for so many of our clients, incorporating their business is one of the first major hurdles to leap over on the road to success. Whether you have inquiries about the best way to incorporate, have questions about qualifying in our great state of California, or need some more information about the various laws and regulations that may impact your burgeoning business, our doors are open. We are happy to spread some of our expert knowledge around.