How To Incorporate

By Dan Handle, 18 Jan 22:00

The most important thing to remember when forming a corporation is that, legally, it is a separate entity from the individuals who own or operate it.

You may own all of the stock in the corporation and you may be its only employee, but when you form a corporation, you and it become separate legal entities.

Because a corporation is a legal entity, its organization and operation procedures are governed by very specific state laws. These laws often vary from state to state. However, the corporate elements and procedures are generally the same for forming all types of for-profit corporate entities.

The following are eight basic steps to incorporating your proposed or existing business.

1. Choose And Reserve A Corporate Name

All states prevent two or more corporations from registering or using the same name, including names that are very similar. Accordingly, you
Amazon.com was originally going to be named should check in advance to see if the name you want to use is available.

Contact the state office that handles corporate filings (usually either the Secretary of State or Corporations Commissioner). Usually they will be able to tell you by phone if there is a potential conflict, and if there isn't, explain how to reserve your proposed name for a month or two to give you a chance to file your formal incorporation papers.

Unfortunately, finding an "available" name doesn't guarantee that you can use it. If you will use the name to identify goods and/or services, you will also need to check to see if your name violates another business's trademark. There are search firms that can do this for you or you can do this on your own by checking with state and federal trademark registers.

If you are using a name other than your own, you will need to have published a fictitious name or "DBA" statement in your local paper. Be advised that incorporated business names will include the words "Corporation," "Incorporated," "Company," "Limited," Corp.," "Inc.," Co.," or "Ltd." after it.

2. Select A Corporation Type
There are different kinds of for-profit corporations offering various benefits and tax advantages. You can choose to form:
a regular or "C" corporation (unlimited shareholders) an "S" corporation (limited shareholders) or a professional corporation (a group of licensed professionals such as lawyers, doctors, etc.)

You should research the type of corporation best suited to your - and your business's - needs. To begin this process, take a look at "How-To Understand Corporations" and "How-To Choose A Corporate Entity For Your Business." It is also advisable to consult with your attorney and/or accountant, as well as with your business associates in making this decision.

3. Decide Where You Will Incorporate
Whether your business has one or 100 offices, you must file for incorporation in the state where your corporation is headquartered. Sometimes, people set up headquarters in states with liberal incorporation laws or that offer other benefits (such as Nevada or Delaware). However, in any state, you will be required to meet the business residency requirements of that state in order to incorporate. The best state in which to incorporate is generally where you and other incorporators associated with your business actually live.

4. Create A Pre-Incorporation Agreement
This is best when you plan to incorporate a small business owned by a handful of shareholders, each of whom will actively take part in the day-to-day operation of the business. Although not legally required, a pre-incorporation agreement can be a very useful aid in starting a new corporation.
This agreement should include:

-shareholders' names
-the state in which you plan to incorporate
-your corporate name
-your corporate purpose
-number of shares of corporate stock the -corporation will be issuing
-stock subscriptions per each shareholder (the -number each initial shareholder is planning to buy and for how much)
-tax status selected (this varies from one kind of corporation to another)

5. Prepare And File Articles Of Incorporation
You begin the formal process of incorporation by preparing an Articles of Incorporation or alternately titled form (some states use the term "certificate of incorporation"). Usually your state corporate filing office or a commercial printer can provide a pre-printed form.

To put together this formal incorporation document, you must first research the laws governing corporations in your state and then decide on the following elements:

Who Is The Incorporator(s). Also called the "Promoter" in some states, this is the person responsible for creating the corporation who agrees to accept any legal papers that may be served on the corporation at a later date.

Although several people can serve as incorporators and sign the Articles of Incorporation, all states (except Arizona) have adopted legislation that permits a corporation to be formed by a single incorporator. (In Arizona, two is the current minimum).

Number And Type Of Shares Of Stock To Be Held By One Or More Shareholders. Your new corporation will be authorized under state law to issue a certain number of shares of stock. This number is usually established at the time you incorporate, and in some states will be tied to the fees you pay the state for incorporating. All the same, it's a good idea to have plenty of stock authorized so that you will have some in reserve after you issue shares to initial shareholders (though it is possible to get authority later for more stock).

Realize that there is a difference between authorized "common stock" and issued "preferred stock." Common stock does not guarantee a dividend, whereas preferred stock guarantees that owners receive a fixed dividend before dividends are paid out to common stock holders. (Instead, most small corporations usually elect to compensate owners through salaries, bonuses and fringe benefits).

Besides the above, your articles of incorporation will also require:
-The name and purpose of your corporation
-The desired kind of corporation and tax status
-The principal place of business
-Upon completion, file this document with the appropriate state agency. You will be required to pay a registration fee that can range from $200 to $1000 depending on the state.

6. Prepare Corporate Bylaws
Corporate Bylaws mainly recite the rules of corporate life under your state's laws and allow owners to fill in rules left to their discretion, such as the number of members on your board of directors, rules for calling and conducting regular and special director and shareholder meetings. Bylaws also include basic "rules of order" governing voting procedures.

This document does not need to be filed with your Articles of Incorporation, however, it must be prepared as part of your incorporation process.

7. Record Minutes Of Your First Board Of Directors Organizational Meeting

Meeting minutes are notes that record the topics and decisions discussed at a meeting. State law requires that notes are taken at your corporation's first Directors Organizational Meeting, as well as all subsequent board meetings, and kept on file.

The Board of Directors Organizational Meeting is generally the first meeting of your Board, the individual(s) who will "direct" your business. Your initial Board is usually selected by the incorporator. At this first meeting the Board (which can consist of one Director/Owner) must elect Corporate Officers who are salaried and responsible for conducting your corporation's day-to-day business.

According to law is most states, Corporate Officers must include at least a President, Secretary and Treasurer. The President is usually the chief operating officer of the corporation. The Secretary is responsible for all corporate records and required paperwork, including notes that must be taken at each Board of Directors meeting. The Treasurer is responsible for the corporation's finances, though it's common practice to hire a part-time bookkeeper to handle day-to-day accounting duties. The corporation can, of course, have other officers, such as a Vice-President. In most states, one person is able to hold all of the required offices.

This first meeting can also include other duties of the board related to making policy, real estate and other key decisions and establishing a schedule or dates for regular (usually monthly) board meetings and the annual shareholder meeting. Most significantly at this first meeting, the Board is responsible for authorizing the issuance of stock.

8. Issue Shares Of Stock
The final phase of incorporation occurs when you file a Notice of Stock Issuance with the Department of Corporations, issue stock certificates to shareholders, and prepare stock documentation.

Unless your corporation qualifies for an exemption, you must register every issuance of stock with the federal Securities and Exchange Commission (SEC) and your state securities agency.

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