Starting a new business is exciting and incorporating a business part of the process of starting that small business. Understanding how lawyer go through the process of incorporating a business takes the mystery out incorporating a business. One of the first step in the incorporating process is coming up with a business name.
What State is Best When Incorporating a Business?
When incorporating a business, the process for incorporation is different for each state; therefore, it is prudent to consult with an attorney to get the minutia for incorporation. Where do you want to incorporate? If you are examining the process of incorporation in California, you may already be aware that California is known as a beneficial state in which to incorporate for a variety of reasons.
If you have specific questions about how the process works in California, please get in touch with our business incorporation attorney. Alternatively, you may learn how to form a corporation in California.
Did you know that corporations are able to own property? LLCs are also able to do this, and owning property is something that can help increase the value of a company. This is because that property is an asset.
One of the main issues for small business owners who seek to own property is worrying about debt. Everyone deals with the issue of debt sometimes, and it is widely recognized that one’s property can be impacted by outstanding debt.
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The LLC Exception
If your business is a corporation, this scenario could easily occur. But, if you own an LLC, then, because of the way LLCs are structured, your personal property and other assets will not be impacted by your company’s debt. In this way, the owner of the LLC is exempt.
Douglas Wade, Attorney
Advantages of Incorporation
Did you know that there are strong benefits to the process of incorporation? One of these is this: if you choose to structure your business as an LLC, the owners will not be liable, personally, for any debts that accrue. Nor will they be liable for other obligations.
A key difference here is that if your business is a sole proprietorship or a general partnership, then it can be liable, personally, for debts. This is also true for corporations.
The main advantages of incorporating a business are:
- Your business expenses will enjoy some deductions.
- The brand that you are proudly building will remain protected.
- Your new company will enjoy a stronger sense of credibility.
- You will find it easy to procure financing.
- Your customer base will increase based on an added level of client trust.
- A flexible structure will provide increased maneuverability.
- Your corporation will be free to experience growth.
- New opportunities to invest will become available.
- You will enjoy a separate, unique credit rating (different than that of the owner or owners), and therefore you will begin building a new and unique history of credit.
Here’s an example: let us say that you are a shareholder in a company, and you acquire $500 in stocks. You are therefore responsible to your business for that $500, but no more and no less. This option provides more freedom to many small businesses.
Let’s keep going over the finer points of this process of incorporation and why it might be worth considering for your business venture by learning What’s the Difference between an S Corp and a C Corp?
You will be granted increased flexibility in terms of taxes and tax-related advantages. This is because corporations, or corps., pay taxes at a lesser rate than that of the individual. Corporations also can own percentages of other corporations. Now, what is taxable? Only 20% of dividends from the company’s holdings. Plus, your corporation can have unlimited losses and even bring that number into future years. This can help to offset the company’s taxable income. If you have further questions, please contact our incorporation attorney.
Steps for Incorporating a Business
When you decide to incorporate your business in California, you will enjoy many different types of benefits. Whether you are a non-profit or a more traditional business, and whether you are an LLC, a C Corp, or an S corp, this process is definitely worth looking into.
If this idea of incorporation appeals to you, we have compiled a brief list that should help you to follow through on all the necessary tasks and cross things off your list, one at a time. If you need any clarification on these steps that are necessary to the process of incorporation, please let us know. We think this list should have you covered, though!
Step 1: Draft Article of Incorporation
First, you will need to draft an Article of Incorporation and file it with the state of California (or wherever you are incorporating). This document will outline all the important and essential information regarding your company.
Article Specifics
- Company name
- The purpose of your company; what you are trying to accomplish with your business
- Your principal location of the business
- Will you issue stock, amount of shares, and accompanying value?
There is a fee in order to submit these articles, and it varies based on state. Also, note that you should be able to find some templates for this document on the internet in order to help set it up and fill it incorrectly.
Step 2: Naming Your Company
Next, you need to name your company. This exciting part of the journey is not without its demands, so take it seriously. Your name needs to be original, fresh, and representative of the business you plan to run. Here are a few tips we’ve culled after years of experience:
Do some research before incorporation begins. Whether it is naming requirements or competitors with similar names, you want to be informed and ready.
Each state has different requirements, so be sure to check in on the ins and outs of the process in your particular state.
Make sure to choose and include one of these in the name:
- LLC.
- INC.
- Corp.
Three essential parts of your business label:
- The original name that makes the first impression
- The part of the name which conveys the essence of the business; what you and your employees will do
- The ending, which must be in coordination with legal guidelines and your state
Here is an example: let’s say the name of the small California business is Electric Surfboards Inc., then the “Electric” is the original piece, “Surfboards” is the descriptive part, and “Inc.” completes things with the specific legal ending.
Step 3: Draft Operating Agreement
Drafting an operating agreement is not required by every state, but it is known to be a beneficial idea for your business. This agreement generally provides a framework for all of the important aspects of your company, including:
- Chosen name
- Hiring of personnel
- Location
- Day-to-day proposed activities
- Goals
- Chosen structure
Tip: one of the most important aspects of a business is the structure. When you choose an LLC, you are starting a business that will prove to be, say, very different than a General Partnership, for example. Each type of corporation presents different advantages and disadvantages, and this is a crucial aspect of this entire process of incorporation. Make sure you are confident in your choice, do your research, and let our business attorneys know if you have questions
Step 4: Corporate Bylaws and Directors
The filing of your bylaws is an important step for any business and an integral part of the incorporation process. While some states do not require you to pen these laws, others do require all corporations to file. In this case, the state of California does require Corporate Bylaws for the majority of cases. What will these bylaws allow you to do? These laws will simply help to present and enforce certain acts, such as notification methods, voting procedures, shareholder meetings, and more.
The appointment of your directors may also not be mandatory, but it will make both incorporations and the first chapter of running your business much easier. In California, many company owners decide to appoint managers or directors in order the help with the day-to-day running of your business. It is also true that instituting directors can be conducive to running an effective business. While it can be a challenge to have too many voices in the board room, it can also be a challenge to run an entire business by yourself or with only one or two other partners. Directors can help encourage parity and provide help with key decisions.
Tip: It is true that some states possess rules concerning how many managers or directors you can appoint, so make sure to check.
Step 5: Identify Agent for Service of Process
In most states, you will need to find what is called a “registered agent.” When you appoint this individual to this position, they will oversee any legal action that may be taken against you. We know it is not something you want to consider now, but it is good to always be prepared.
Step 6: Get a FEIN (what’s a FEIN?)
From the IRDS, you will be able to procure the identification number for federal employment (FEIN), and this will serve as the original number for identifying your business. You will also use this number for opening corporate bank accounts and credit cards.
Step 7: Open Business Accounts
Count on opening some business accounts for your newly incorporated company, and keep the record of expenses and costs of your business, separate from that which is personal. This is a crucial step in terms of limiting any personal liability. You will also want to set up your accounts and make sure going forward that every single transaction is noted in your books. Keeping detailed records is a safe, wise choice, and this will help you to stay in accordance with not only federal laws and regulations but also those that are locally enforced by your state. The way in which you do this is up to you—some small business owners employ an accountant, while others are comfortable using online software. There are a number of great options out there; take a look!
Step 8: Hire Employees
Are you planning on hiring employees immediately to help with your company? If so, let us make a few suggestions:
- Make sure to buy comprehensive and reputable unemployment insurance
- Make sure to also purchase workers’ compensation
- Be aware that you will need to keep track of additional records, including employee payroll
- There may be additional requirements that come with hiring employees in your state, so make sure to do a little research
Step 9: Form an Agreement Among Shareholders
Are you planning on issuing stock? That is great, but be aware that you must document the details of how you will transfer and buy stock, as well as other pertinent processes.
Step 10: Have the First Board Meeting
Here are some of the tasks you should try to complete in the initial meeting:
- Appointment of officers
- Writing of bylaws and their adoption
- Issuances of stock
- Creating a stock certificate
- Creating a corporate seal
Tip: Are you an S corp? If so, your board of directors should plan to vote on the election of this structure.
Step 11: Issuing Stock
There is no debate here: you must issue stock. This is because you cannot start up without issuing stock shares and dividing them up among the business owners. You are unable to open your business until your stock shares are issued and then divided among the owners. If you are a large corporation, you will be required to register your stock with the SEC as well as agencies in California or your chosen state. Smaller corporations with less than 35 people holding stock, as well as private offerings, do not usually have to register with the SEC, but it is worth checking.
As with every aspect of the process of incorporation, make sure to maintain meticulous records of the individuals who hold stock, the exact number of shares they have bought, and how they paid for the purchase. Stock certificates should also be issued.
Tip: Some states require a notice or receipt of these stock transactions, so it is better to keep ordered records and be prepared. Check-in with your state before you begin issuing stock and always stay in accordance with state and federal regulations.
Step 12: Finish the Process of Incorporation
We wish you the best of luck with your new business and great success in your journey from “newly incorporated” to a successful business.
Whether you are running a small business or a larger company, we hope this information allows you to make the correct decisions regarding your greater interests, your employees, and your overall business career. Congratulations on embarking upon the process of incorporation—it is a significant step in not only your profession but your life.
If you are left with questions about the process of incorporation, schedule a free consultation with us at Nakase Wade.