Incorporating Your Business

Getting Started

To start the process of incorporating, contact the secretary of state or the state office that is responsible for registering corporations in your state. Ask for instructions, forms and fee schedules on business incorporation. It is possible to file for incorporation without the help of an attorney by using books and software to guide you along. Your expense will be the cost of these resources, the filing fees, and other costs associated with incorporating in your state.

If you do file for incorporation yourself, you'll save the expense of using a lawyer, which can cost from $500 to $1,000. The disadvantage of going this route is that the process may take you some time to accomplish. There's also a chance you could miss some small but important detail in your state's law. You may also choose to use an incorporation service company to prepare and file the documents with the state.

One of the first steps you must take in the incorporation process is to prepare a certificate or articles of incorporation. Some states will provide you with a printed form for this, which either you or your attorney can complete. The information requested includes the proposed name of the corporation, the purpose of the corporation, the names and addresses of the parties incorporating, and the location of the principal office of the corporation.

The corporation will also need a set of bylaws that describe in greater detail than the articles how the corporation will run, including the responsibilities of the shareholders, directors and officers; when stockholder meetings will be held; and other details important to running the company. Once your articles of incorporation are accepted, the secretary of state's office will send you a certificate of incorporation.

Where to Incorporate
One major decision to make when incorporating involves selecting the proper state of incorporation. You're not required to incorporate in the state where your business operates; you can choose from any one of the 50 states or the District of Columbia.

A corporation is referred to as a foreign corporation in all states except for the state where it is incorporated. If a corporation is transacting business in a state other than where it was incorporated, it may be required to register for a certificate of authority to transact business (also called foreign qualification) in the other state. If a corporation is transacting business and fails to register as a foreign corporation, it may lose access to that state's courts and face tax fines and penalties.

A foreign corporation that registers for a certificate of authority in another state must pay state filing fees for the qualification filing; these fees are typically more expensive than the cost of filing for a domestic corporation. Also, foreign qualified corporations are subject to taxes and annual report fees from both the state of incorporation and the qualifying state. Thus, the actual advantage of incorporating in a state with very low initial filing fees and low corporate income tax is not as great as it appears if your business must still qualify to do business in its state of operations.

The definition of "transacting business" depends on the state and the situation. Consult your attorney to determine how the law applies to your situation. In general, though, some factors that a state considers when determining whether a corporation is transacting business in a state include:

  1. Does the corporation have a physical presence in the state?
  2. Does the corporation have employees in the state?
  3. Does the corporation accept orders in the state?
  4. Does the corporation have a bank account in the state?

Note that simply transacting business via mail order or the Internet typically does not equal transacting business; however, the determination is made on a case-by-case basis. Again, consult your attorney for specifics, as this list is not intended to be comprehensive.

How Incorporating Affects Funding
If you plan to seek investment, the preferred entity of most investors and VCs is the C corporation, which is the standard corporation formed by incorporating. Limited Liability Companies, Limited Liability Partnerships and other entities are not favored due to the variation in rules between states and because they do not have the legal structure of shareholders, a board of directors and officers, which are standard components of investment.

If you have less than 35 shareholders, you'll probably want to elect to be an S corporation for tax purposes. You must file the election form 2553 within a short time after incorporating, so be sure to check with the IRS regarding the filing and the deadlines. If you need to expand beyond 35 shareholders in the future, you can change your tax status back to a C corporation to do so.

Anytime you're dealing with investor-related agreements and stock grants, you'll want to work with a securities attorney. These areas are complex and vital to making sure you retain control and future benefits from your company. As a side note, the attorney you work with usually should not be a shareholder or a board member of the company. If he or she suggests this, then you should discuss the Professional Responsibility Rules of his or her State Bar with the attorney, phone the State Bar attorney complaint line to discuss the situation and make sure his or her actions are ethical.

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