How to Incorporate Your New Business
In their book Start Your Own Business, the staff of Entrepreneur Media Inc. guides you through the critical steps to starting your business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors briefly describe what you need to do to make sure your corporation stays on the right side of the law.
To start the process of incorporating, contact the secretary of state or the state office that's responsible for registering corporations in your state. Ask for instructions, forms, and fee schedules on incorporating.
If you're trying to save money, it's possible to file for incorporation without the help of an attorney by using books and software to guide you. Your expense will be the cost of these resources, the filing fees and other costs associated with incorporating in your state.
If you do it yourself, you'll save the expense of using a lawyer, which can cost anywhere from $500 on the low end to $5,000 if you choose a firm that specializes in startup businesses. The disadvantage to not using an attorney 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.
One of the first steps in the incorporation process is to prepare a certificate or articles of incorporation. Some states provide 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 those incorporating, and the location of the principal office of the corporation.
The corporation will also need a set of bylaws that describes, in greater detail than the articles, how the corporation will run, including the responsibilities of the company’s 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.
Once you're incorporated, be sure to follow the rules of incorporation. If you fail to do so, a court can pierce the corporate veil and hold you and the other business owners personally liable for the business’s debts.
It's extremely important to follow all the rules required by state law. You should keep accurate financial records for the corporation, showing a separation between the corporation’s income and expenses and those of the owners.
The corporation should also issue stock, file annual reports, and hold yearly meetings to elect company officers and directors, even if they’re the same people as the shareholders. Be sure to keep minutes of shareholders’ and directors’ meetings. On all references to your business, make certain to identify it as a corporation, using Inc. or Corp., whichever your state requires. You also want to make sure that whomever you will be dealing with, such as your banker or clients, knows that you are an officer of a corporation.
To make sure your corporation stays on the right side of the law, heed the following guidelines:
- Call the secretary of state each year to check your corporate status.
- Put the annual meetings (shareholders and directors) on tickler cards so you don't forget to hold them.
- Check all contracts to ensure the proper name is used in each. The signature line should read “John Doe, President, XYZ Corp.,” never just “John Doe.”
- Never use your name followed by “dba” (doing business as) on a contract. Renegotiate any old ones that do.
- Before undertaking any activity out of the normal course of business—like purchasing major assets—write a corporate resolution permitting it. Keep all completed forms in the corporate book.
- Never use corporate checks for personal debts and vice versa.
- Get professional advice about continued retained earnings not needed for immediate operating expenses.