Because there are so many procedures involved, the process of incorporating a business could appear to be overwhelming to you. However, it is possible that the additional effort necessary to incorporate a business or an LLC will be well worth it. Your personal assets are safe from being put in jeopardy thanks to the liability protection offered by the corporate structure in your role as a business owner. Organizing the company as a corporation would also make it possible for you to solicit financial backing from third-party investors and, eventually, to take the business public. So, we’ll cover the steps necessary to incorporate in both California and Delaware here.
But before we go into that, let’s define incorporation.
What is Incorporation?
Incorporation is the legal method by which a business or company is made. The result of this is a formal entity called a corporation, which keeps the firm’s assets and income separate from its owners and investors.
Corporations can be made in almost every country in the world, and their names generally have words like “Inc.” or “Limited (Ltd.)” to show that they are corporations. It is the legal process of setting up a business as a separate company from its owners.
Incorporation: A Clearer Picture
The general word for a business that has filed paperwork with a state to establish itself as a legal entity is “incorporate.” Even in the case of a sole proprietorship, the business entity in question is likely to be owned by shareholders and governed by a board of directors.
However, it is not necessary to form a corporation in order to run a business. Owners have the option of running their businesses either as single proprietorships or partnerships. Debt and taxation are handled differently for a limited liability company or a partnership than for a corporation.
The ability to issue shares of stock is a key benefit of incorporation and a key difference between corporations and other legal bodies. When a business becomes a corporation, it can distribute ownership stakes to its shareholders in the form of stock. When a firm is incorporated, its owner can sell shares to outside investors, but under a sole proprietorship or partnership, the only owners are the people running the enterprise.
A company can opt to formalize its existence by forming either a corporation or a limited liability company. Each sort of incorporated entity will have its own form, although the specific filing procedures may vary by state.
Types of Incorporation
Depending on your business’s objectives, you can form a corporation in one of several different ways. The initial incorporation process is the same for all corporations, but the specifics of each form of business are unique.
- C corporation. C corporations, or C-corps, are legal entities in their own right, separate from their owners. A C-corp can have an unlimited number of stockholders. The debts of the firm cannot be charged against the personal assets of the owners. For C-corporations, the federal tax rate on corporate income is currently at 21%. C-corporations incur double taxation since shareholders also need to report dividend income on their individual tax filings.
- S corporation. To put it another way, an S corporation (or “S-corp”) is a “pass-through” company. Income is distributed to shareholders and treated as personal income for tax purposes rather than being subject to the corporate tax rate at the federal level. There is a 20% deduction for eligible business income for pass-through entities under federal law.
- B corporation. A B corporation is a for-profit business with a social or environmental goal. Also, B-corporations are subject to corporate taxes and may be obliged to file annual reports detailing their philanthropic activities. Shareholders in a B-corp are not only the legal owners of the company but also have the duty of ensuring its continued success and public benefit.
Why Should You Incorporate Your Business?
The reasons for forming a corporation for your company may be obvious to you. One or more of the following may be motivating factors: tax benefits, the desire to issue stock to raise funds, or corporate growth.
Whatever your motivations may be, it’s important to consider the pros and cons to incorporate a business.
The following is a summary of the benefits and potential drawbacks of forming a corporation for one’s business.
Pros
- Risk Isolation. The owners’ exposure to personal lawsuits is reduced when a company is incorporated. To put it another way, the owners are shielded from any legal responsibility for the company’s obligations. Instead, corporate entities must fulfill these commitments on their own. In the case of small business owners, this is especially crucial because they may lack the wherewithal to pay off substantial debts or settle costly legal issues.
- Fiscal Advantages. Tax advantages can be gained through forming a corporation, such as reduced tax rates for corporate income and tax write-offs for items like salaries, benefits, and business expenses.
- Existence Without End. Regardless of who holds control or how often they change hands, a corporation can continue operations indefinitely. This facilitates long-term preparation and the acquisition of necessary funds.
- Finance Availability. Having a corporation as your business structure increases the likelihood that investors will put money into your venture.
Cons
- Ownership and Management. Companies are owned by shareholders, who are sometimes at odds with one another. Because of this, it may be challenging to make judgments and keep a consistent corporate plan.
- Cost. As a result of the need to pay legal and administrative expenses, incorporating a corporation can be quite pricey.
- Conflicting Taxes. Companies pay taxes on their earnings at both the corporate and personal levels, a situation known as “double taxation.” As a result, the corporation and its owners may have to pay more in taxes.
- Complexity. There are greater administrative and legal obligations placed on corporations than on other types of commercial organizations. As a result, they may be trickier to run and administer.
In order to decide whether or not incorporating is the best option for their business, entrepreneurs need to think long-term and get advice from legal and financial professionals.
How to Incorporate Business
If you’ve concluded that forming a corporation is the best route for your business, you should familiarize yourself with the necessary steps. The steps to incorporate a business can be complex, calling for careful preparation and attention to detail. Here are the top detailed steps to incorporate a business.
#1. Pick a Name for Your Company
The first step to incorporate a business is coming up with a name that is unique, easy to remember and conveys what the company is all about.
You should begin by considering what kinds of concepts would appeal to your company’s ideal client. Think about things like how they sound, if they’re available as domain names, and if they’ll cause any brand confusion.
Find out if the name is being used by another business, and get input from possible clients. After settling on a name, it must be submitted to the state’s department responsible for registering businesses.
#2. Choose Your Operating Locations Wisely and Obey All Laws
The company should be in compliance with all applicable licensing and zoning regulations before forming the corporation. Having the necessary licenses and permits to conduct business is part of this, albeit other industries do not mandate this.
This may, by extension, affect your choice of base of operations and, eventually, your incorporation jurisdiction. There are numerous kinds of applications and filing procedures depending on the state in which the firm is incorporated. A foreign corporation filing, for instance, could be necessary if you decide to incorporate in a state other than your home state. However, incorporating in a separate state may lessen the financial outlay and administrative burden associated with doing so.
#3. Choose a Legal Business Structure
Business ownership, managerial roles, and taxation are all affected by the corporate structure you choose in the third step to incorporate a business.
LLCs and Corporations (including S- and C-Corporations) are the two most common types of legal businesses.
Because of the limited liability protection they provide, LLCs are popular among small enterprises. They allow for pass-through taxation and have adaptable ownership and management structures.
In order to form a limited liability company (LLC), you must first file articles of formation with the state, draft an operating agreement, and get any necessary permissions and licenses.
For firms that need to acquire finance or have several owners, the complexity of a corporation can be worth it. Articles of incorporation, bylaws, stock, and necessary licenses and permits must all be filed with the state in order to establish a corporation.
#4. Set up a Registered Office or Agent
Someone must be designated as the company’s registered agent in order for that individual to receive legal notices and deliveries on behalf of the business. Having a local point of contact for official state business is why companies must designate a registered agent, and why states demand it.
However, the owner of a company is not required to serve as the company’s registered agent. A business attorney, for instance, can act as a company’s registered agent if their office is located in the state where the firm will be established. If the registered agent leaves the state in which the company is incorporated, the corporation must select a new agent. For a price, you can also find online legal services that offer registered agent services.
#5. Get Your Articles of Incorporation Ready and Submit Them
Among the information required by law to incorporate a business are the company’s name, address, stated mission, and initial board of directors.
The legal formation of your business and its organizational structure are dependent on your having properly prepared and filed the Articles of Incorporation.
In most cases, this entails preparing the document in accordance with state regulations, paying any fees associated with filing it, and submitting it to the relevant state agency.
#6. Create Company Regulations
Companies must also create bylaws that detail such things as how compensation is to be distributed, how shares are to be issued, who has what voting rights, and how the board of directors is to function, in addition to the articles of incorporation.
The corporate bylaws provide a more comprehensive framework for running a company. The bylaws of a firm are frequently consulted in order to determine the correct course of action. Although copies of these are not required by law in all places, they may be necessary when dealing with certain organizations (such as opening a bank account). Bylaws can also be updated to reflect the dynamic character of a company.
#7. Establish a Corporate Register
The articles of incorporation, corporate bylaws, meeting minutes, and other papers pertaining to the running of your firm should all be kept in a legal binder, which can be either physical or digital.
To maintain complete and well-organized records that may be used as proof of meeting all applicable laws and regulations, a corporate records book must be established.
Obtain a binder, organize the documents in a way that makes sense, and assign someone the task of keeping the information in a safe and secure location to establish a corporate records book. In addition, make sure to keep the book up-to-date and in a safe place.
#8. Decide on a Governing Body
The board of directors is accountable for monitoring the management and operations of the business.
Selecting a competent board of directors is crucial to a company’s development because it ensures that the helm will be held by persons with the knowledge and expertise to steer the company in the proper direction.
Board members are chosen by finding suitable candidates, assessing their skills and experience, and selecting the individuals who will provide the most valuable support for the company’s objectives.
Make sure the board members know what is expected of them and are dedicated to doing what is best for the firm and its stakeholders.
#9. Submit Applications for State and Local Licenses and Permits
The final stage in forming a corporation is to get the relevant licenses and authorizations from the relevant federal and state agencies.
In order to do business legally, you must take the appropriate steps, such as registering with the IRS for an Employer Identification Number (EIN), opening a business bank account, buying the appropriate insurance, and securing any necessary licenses or permits.
You will need to submit applications, paperwork, and payments related to these permissions and licenses, so it’s important to learn about the unique requirements for your business and area.
In order to avoid fines and lawsuits, it is imperative that the necessary permits and licenses be obtained before beginning operations.
What’s the Difference Between LLC and Corporation?
There is one primary distinction between a limited liability company (LLC) and a corporation, and that is that an LLC can be owned by one or more individuals, whereas a corporation is owned by its shareholders. Regardless of which entity you decide to use for your company, you will find that both entities provide significant benefits to your company.
How to Incorporate in California
If you’re serious about the long-term success of your firm, incorporation is a must. You have a choice of jurisdictions in which to incorporate your business, despite common belief to the contrary. Many business owners find that forming a California corporation is the best option, regardless of where they actually live.
Why Incorporate a Business in California?
By forming a corporation, your firm, and its assets are shielded from personal liability. Incorporating your business offers you the credibility of a legitimate business, increasing the likelihood that others will choose to collaborate with you. There are a variety of factors that influence a company’s decision to incorporate in a different state. However, incorporating a business in California is a common practice because of the state’s robust business environment and advantageous regulations.
The management structure of a California corporation is highly adaptable because the state requires just the president, the chief financial officer, and the secretary to be included in the Articles of Incorporation. The same person can serve in all three of these capacities. You’ll have a lot of leeway in selecting future members of the executive team of your company. The privacy of shareholders and executives is yet another benefit of founding a California professional business. Stockholders’ personal information is not required to be made public by the state, only that of the company’s director and resident agent.
Last but not least, the state of California has a low corporate tax rate of just 9%, with additional benefits available depending on the business structure chosen.
Here are the simple steps to incorporate a business in California.
#1. Identify a California-Based Company
It can be challenging to think of a suitable name for your California corporation. The success of a new venture depends in large part on its name, therefore it’s important to give some thought to this decision. If you choose poorly, you may face overwhelming legal and commercial obstacles.
Basic name conventions are as follows:
- Do an eligibility search for your desired name on the website of the California Secretary of State to see if it is eligible for use. In accordance with California law, “the Secretary of State shall not file a document or grant a name reservation that includes a proposed corporate name that is the same as or deceptively similar to an existing corporate name.”
- Search the U.S. Patent and Trademark Office’s trademark database to check sure no one else has trademarked the name you’re considering using.
- You should do a thorough online search to make sure the name isn’t already in use.
- The words “Incorporated,” “Inc.,” “Corporation,” “Corp.” or “Limited” must appear in the business name in accordance with California law. For instance, “Leads Glass & Metals, Inc.” is a common choice for such a purpose.
- Avoid using names that can confuse the general public (for example, ones that sound like they come from the government).
- Without the proper authorization, financial institutions including banks, insurance companies, and credit unions cannot use certain phrases in their names.
- To secure the name’s use, you should apply to register it as a trademark with the USPTO or the state.
- Choose a name that is easy to spell.
In addition, a “doing business as” (DBA) registration may be required if your company intends to conduct business using a name other than its legal name.
#2. Pick a Registered Agent in California
A “registered agent,” often termed an “agent for service of process,” must be listed in your California business formation forms.” A California corporation must have a registered agent, who is a person or corporation that can accept legal and tax notices on the corporation’s behalf.
Furthermore, a California resident or registered agent can serve in this role, although any officer, shareholder, director, or other California resident will do. The registered agent must have a street address in California (a Post Office Box is not acceptable) and that address must be made public on the website of the California Secretary of State. The availability of a registered agent is required during regular business hours.
#3. Draft Articles of Incorporation and Submit Them for Filing
To incorporate a business in California requires filing a certificate of formation with the Secretary of State after the corporate name and Registered agent has been chosen. You can file this yourself, have your company attorney do it, or use an internet incorporation provider. Articles of Incorporation describe this paper. When there is just one type of share at issue in California, the ART-GS form is the one most commonly utilized for filing, though any format that satisfies the law will suffice.
#4. Create a Board of Directors for the Company
In accordance with California law, every corporation must have a board of directors to manage and oversee the company’s operations. In most cases, the incorporator will appoint the first board of directors as part of the incorporation process by filing a short Statement of Incorporator.
Being a director of a California corporation does not necessitate any specific level of education, work history, or age.
However, even if there is only one shareholder, the company must still have at least one director. There must be a minimum of two directors for a company with only two shareholders. There must be a minimum of three directors for each corporation with three or more shareholders.
#5. Establish and Execute Corporate Bylaws in California
The bylaws of a corporation outline the rights and obligations of shareholders, directors, and executives. Bylaws for your company can be found in a “standard” collection of templates provided by most lawyers and incorporation providers.
In most cases, the board of directors will vote to accept the bylaws during the organizational meeting, or they may vote to adopt the bylaws with unanimous written consent in lieu of holding an organizational meeting.
#6. Distribute Stock
Owners of a corporation make initial financial commitments to the business by purchasing shares of stock. A vote of the board of directors must occur prior to the selling of any shares of stock at any price. Securities laws at the federal and state levels may apply to any stock sale. However, a “private placement” exemption from the registration requirements of the securities laws will likely be available for many tiny companies with small stock issuances to founders. Within 15 days of the issuance of shares in California, a notice may need to be filed with the California authorities under Section 25102(f) of the California Corporations Code. Electronic submission is possible for this notification.
Stock sales to investors require the expertise of a startup/security lawyer due to the complexity of the regulations involved.
You can buy shares for money, or you can trade in goods or services. It is important to keep a stock ledger that details the date, number, and consideration for each stock certificate issued.
#7. Submit a Disclosure Form
Every domestic and foreign corporation doing business in California must submit a Statement of Information to the Secretary of State.
Year during the filing period (month of initial articles of incorporation and five prior months). Within the first 90 days after the filing of the articles of incorporation.
Domestic and foreign firms conducting business in California must submit Form SI-550. Either print it out and send it in by regular mail or bring it in person to submit it. There is a $25 filing fee.
Why Is It a Good Idea to Incorporate?
When you incorporate, you can: Protect your assets. The owners of a corporation enjoy a significant degree of liability protection from any obligations incurred by the corporation. This prevents the company’s creditors from seizing your personal property to pay off business debts.
How to Incorporate Delaware
The price to incorporate a limited liability company (LLC) or incorporate a business in Delaware is consistently cheap, ranking among the lowest in the United States. In addition, Delaware’s pro-business and pro-privacy policies continue to attract business owners, in part because the state does not tax the revenue of LLCs or corporations and does not tax the capital stock of small businesses.
Justifications to Incorporate A Business In Delaware
- Business law in general. Everything else in its category stands up to this standard. It’s easy to understand, and it has all the protections a company needs to weather any storm.
- A government that is friendly to business. Each year, corporate law specialists in Delaware evaluate the state’s company statutes and make recommendations for updates to better serve today’s companies.
- Legal process. Chancery Court in Delaware hears equity disputes involving corporate entity matters; it does not have jury trials, does not pay punitive damages, and has competent judges who make complete findings rapidly.
- Legal precedents. Delaware case law provides corporate leaders and their legal counsel with substantial precedents as the broadest, most thorough, and most complete corpus of corporate case law in the country.
- Corporations Department. The Division of Corporations in Delaware processes over 20,000 corporate files every month with the efficiency of a well-oiled machine, allowing for filings to be expedited within 24 hours or, in circumstances of severe urgency, in one or two hours. Also, read How to Open an LLC in Delaware.
Here are simple steps to incorporate a business in Delaware.
- Pick a name for your corporation in Delaware
- Get a certificate of incorporation ready for filing
- Set up a registered office
- Create company regulations
- Establish a board and meet regularly
- Publish shares
- Franchise tax form and annual report submission
- Receive an EIN
How to Incorporate as an LLC
Forming a limited liability company is easier than a corporation, but there are administrative and legal hurdles. Here are the top steps you need to take to incorporate an LLC properly and in accordance with state legislation.
#1. Select a State to Incorporate Your LLC In
While it is technically possible to incorporate an LLC in any state, the vast majority of business owners choose to do so in the state where their primary place of business is located. One reason for this is to incorporate as a foreign LLC (also known as “foreign qualify”) to conduct business in the state where the LLC will be conducting business can add to the already high formation and administrative costs associated with having an LLC formed in a state other than the one in which the business will be conducted.
Depending on factors like cost, taxation, and LLC legislation, some states may be preferable to do business in than others.
#2. Select a Name for the Company
A unique and available name is necessary to incorporate an LLC. This includes other domestic or qualified LLCs and corporations. Many sole proprietors have a “doing business as” (DBA) or trade name that could be the LLC’s name.
Whether or not the name you want to use as your DBA is available, you should still perform an LLC name search on the website of the state in which you intend to incorporate your business. It’s a good idea to reserve the name even if you aren’t ready to file your LLC formation document just yet. For a small charge and a brief amount of time, you can do so in many states.
Run a trademark database search for the name you want to avoid trademark infringement or customer confusion.
#3. Pick a Registered Agent
You need a registered agent in the state where you file for the creation of your LLC or qualify your existing LLC to do business in another country. Many recent business owners are unfamiliar with the role of the legal agent and the reasons for its necessity.
The registered agent’s address is used for official government and tax-related correspondence with the LLC. Among these are tax records sent by the state’s Department of Revenue and official legal documents, notices, and communications sent by the Secretary of State (like yearly reports or statements). A legal representative must also accept legal documents like a summons and complaint to alert the LLC of litigation. The registered agent also receives other types of legal processes, including subpoenas and garnishment orders.
#4. Create an LLC Operating Contract
It is the law in almost every jurisdiction that an LLC has an operating agreement. Even while in most jurisdictions an operating agreement can be oral, it is strongly advised that every limited liability company have one in writing. The operating agreement is a contract between the limited liability company and its member(s) or members. An operating agreement is necessary even if there is only one member. It demonstrates that you value the LLC as a legal entity in its own right (and can help prevent piercing the veil), and it gives you the opportunity to express your wishes for the LLC in the event of your incapacity to manage the business in writing.
A well-drafted operating agreement is crucial for every LLC, but it is especially crucial for multi-member LLCs. Having a written agreement that details the distribution of assets, responsibilities, and earnings can help prevent disagreements among business partners. It should specify, for example, who is in charge of what, how decisions are made, how members are added or removed, how distributions, profits, and losses are distributed, and more. If you really want to cover all of your bases, having a lawyer look over the operating agreement is a good idea.
#5. Company Registration With the State
LLC formation documents (also known as a Certificate of Organization, Certificate of Formation, or Articles of Organization) are filed with the Secretary of State or other agency responsible for business filings in the state in which the LLC is being formed to make it legally operative. All 50 states have different filing fees.
#6. Receive an EIN
The Internal Revenue Service (IRS) mandates that all businesses have a unique identifier known as an employer identification number (EIN). This is the number that will appear on all of your LLC’s financial documents and tax returns. Additionally, in any state where the LLC will be conducting business, registration with the state’s labor department and application for a sales tax identification number are both required.
#7. Obtain a commercial checking account.
Our advice includes a step that is not required by law but is nonetheless highly recommended for anyone forming an LLC: A Business Plan in 10 Easy Steps. It is essential to keep company and personal funds apart. One reason courts “pierce the veil” of an LLC and hold its members liable for its debts is this. In addition to helping your company establish credit, a business credit card can be utilized to assist you to keep your business transactions separate from your personal ones.
Most financial institutions will require details about the establishment, sector, and ownership structure of your business. Before you open an account, you should inquire about the prerequisites with the bank.
Conclusion
In conclusion, businesses that are more complex and want to raise more capital, have the owners avoid personal accountability, and get specific tax incentives can choose to incorporate an LLC and operate using a different operating structure. There are long-term advantages to transitioning away from being a single proprietor or a partner in a partnership and going on to incorporating a business, despite the fact that it is more time-consuming and costly to handle the administrative aspects of doing so.
How to Incorporate FAQs
Why or Why Not Should You Incorporate Your Start-Up?
Before signing any legal agreements (such as leases for office space, equipment, and vehicles), the startup should be incorporated. You will be individually accountable for these agreements if you don’t form a corporation.
Is It a Good Idea to Incorporate?
Yes, it is a good idea to incorporate your business. By separating corporate and personal finances, incorporation helps business owners to take advantage of more tax breaks. Tax savings depend on whether your company is a corporation or an LLC, which is taxed like an individual.
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