Incorporation - Questions and Answers

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What is a corporation?

A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the proper state authority, and all fees are paid.

What paperwork is required to incorporate?

Articles of incorporation conforming to state law must be prepared and filed with the proper state authorities and filing fees, initial franchise taxes, and other initial fees must be paid.

If you incorporate through Business Filings Incorporated, all you need to do is complete our order form. We will prepare and file your articles of incorporation. Additionally, the price you pay includes all filing fees. Just fill out the order form and we do the rest.

Do I need an attorney to incorporate?

No, an attorney is not a legal requirement to incorporate. You can prepare and file the articles of incorporation yourself; however, you need to be thoroughly versed in the laws of your state.

You can use our service to incorporate and save money on attorney fees. However, if you are unsure if incorporation will benefit your business, consult an attorney or accountant.

What should I name my corporation?

Choose the name of your corporation carefully. It is very important that you portray the image you want for your new corporation. Legally, the name you select must not be deceptively similar to any existing corporation in your state. For example, if a corporation named West Corp. exists in your state, you probably would not be allowed to name your business West Corporation. It is possible that the name you select will not be distinguishable; therefore, we ask for a second choice on the incorporation order form.

Additionally, the name you choose must show your business is incorporated. Most states require that the corporate name be followed by Corporation, Incorporated, or an abbreviation. Also, many states allow Limited or Company or an abbreviation of these words to be used as well.

What are the advantages of incorporation?

A primary advantage of incorporation is the limited liability the corporate entity affords its shareholders. Typically, shareholders are not liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder to pay debts of the corporation. In a partnership or sole proprietorship the owner's personal assets may be used to pay debts of the business.

Other advantages:

What are the disadvantages of incorporation?

The primary disadvantage to a corporation is double taxation. Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder. All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax. Further, the double tax can be eliminated by making an S corporation election.

Other disadvantages:

What is an S corporation?

Standard business corporations or C corporations are required to pay income tax on taxable income generated by the corporation. Making a Subchapter S election by completing and filing federal Form 2553 with the IRS is a way to avoid having your corporation treated as a separately taxable entity.

An S corporation is a standard business corporation that has elected a special tax status with the IRS. This tax treatment allows the corporation not to be a separately taxable entity. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship; the income is "passed-through" to the shareholders. Thus, shareholder's individual tax returns report the income or loss generated by an S corporation.

To be classified as an S corporation, a corporation must make a timely filing of Form 2553 to the IRS. This election must be made by March 15 if the corporation is a Calendar year taxpayer in order for the election to take effect for the current tax year. A corporation may later decide to elect S corporation status, but this decision would not take effect until the following year.

In order to qualify for S corporation status, the shareholders must number fewer than 75. These shareholders must be individuals, estates or certain qualified trusts, who consent in writing to the S corporation election. The shareholders can not be non-resident aliens. Also, an S corporation can't issue preferred shares of stock with special liquidation, dividend or conversion rights.

What is the organizational structure of a corporation?

The organizational structure of a corporation relies on three basic groups: shareholders, directors and officers.

A corporation is owned by shareholders; however, they do not directly manage the corporation. Instead, they influence corporate decisions through indirect methods such as electing and removing directors, approving or disapproving amendments to the articles of incorporation and voting on major corporate issues.

The board of directors are responsible for managing the affairs of the corporation. Usually, directors make only the major business decisions and supervise and appoint the officers who make the day-to-day business decisions of the corporation.

Officers are responsible for the everyday management of the corporation. Typically, officers are appointed directly by the board of directors.

It is important to note that a shareholder may serve on the board of directors and as an officer. In fact, in most states one person is enough to form a corporation.

How many directors do I need to form a corporation?

Only one director is required in most states although you are allowed to have more. Some states use the number of shareholders in the corporation to determine the minimum number of directors. If the number of shareholders is three or more, then the corporation must have three directors. If the corporation has less than three shareholders, then the number of directors may equal the number of shareholders. States which have this rule include:
AR, CA, HI, LA, ME, MD, MA, MO, NY, OH, UT, VT.

Where should I incorporate my business?

One of the first decisions a business must make after deciding to incorporate involves selecting the proper state of incorporation. A corporation is not required to incorporate in the state of its operations; however, often the best decision is to incorporate in your home state.

Two issues must be weighed to determine the proper state: (1) a dollars and cents analysis comparing the costs of incorporating in the state of operation versus qualifying to do business as a foreign corporation in the state under consideration and (2) determining the advantages and disadvantages of each state's corporate laws and tax structure. The decision usually falls between the state in which the business is located or Delaware.

If the corporation is a closely held corporation and does business primarily within a single state, local incorporation is typically preferable. The cost of local incorporation will usually be less than incorporating in another state and qualifying to do business as a foreign corporation in the state. A foreign corporation that qualifies to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the qualifying state. Another disadvantage of incorporating outside of your home state is the possibility of having to defend a law suit in another state. If you have any questions concerning where to incorporate consult an attorney or an accountant.

What is a publication requirement?

A few states require notice to be published in a newspaper that a corporation or LLC has been formed. States with this requirement include: Pennsylvania (corps only), Georgia (corps only), Arizona (corps and LLCs), Nebraska (corps and LLCs), and New York (LLCs only). The filing performed by Business Filings completes the publication requirement for each of the states except for New York LLCs.

Getting started

After making the difficult decision concerning what business entity is best for your business, articles of incorporation must be filed with the state government and initial fees must be paid. Business Filings will complete these administrative tasks quickly and effectively.

After your articles are filed, your corporation must hold an organizational meeting where bylaws are adopted and the incorporation process is completed. Share certificates should be distributed to shareholders and these transactions should be recorded on the corporation's stock ledger. All of this information should be kept in a corporate record book.

Business Filings' corporate kit includes all of the information and paperwork needed to make this process easier.