5 Things You Need to Know Before Incorporating a Business

5 Things You Need to Know Before Incorporating a Business

by Jane Haskins, Esq., September 2014

If you’re starting a new business, you’ve probably thought about incorporating. Incorporating establishes a corporation that is legally separate from its owners. Corporations can do many of the things that people can do, including owning property, signing contracts, having bank accounts and filing lawsuits.

But if your business is small, you may wonder whether a corporation is necessary.

The most common reason to incorporate a business is to limit your personal liability for business obligations. This can be a good idea if you have lots of outside contracts. In addition, because a corporation’s ownership is contained in shares that are easy to transfer from one owner to another, a corporation is a good choice if you’re planning to sell the business or want to attract outside investors. And unlike a sole proprietorship or general partnership, a corporation continues to exist beyond the lives of its founders.

However, it costs money to set up and dissolve a corporation, and corporations have additional recordkeeping and annual reporting requirements that sole proprietorships and partnerships don’t have. If your business is small and just starting out, those extra obligations can outweigh the advantages of incorporating.

Depending on your individual situation, a corporation may save you money on taxes, or it may cause you to pay more in taxes. An accountant can advise you on the tax consequences of incorporating.

If you’ve considered the pros and cons and decided that you want to incorporate, you’ll need to prepare articles of incorporation and file them with the state. Each state has its own rules about how to incorporate, but here is some basic information you’ll need:

1. Your Business Name

Rules about business names vary from state to state, but most include these general guidelines:

  • Your business name must be different than the name of any other business entity registered to do business in your state. Most states have an online search tool that allows you to check for similar business names.
  • You are restricted from using certain words in your name, such as obscene words or the word “bank,” unless you are a financial institution.
  • Your name must end with “Incorporated,” “Company,” “Corporation” or an abbreviation for one of those words.

2. Your Business Address

Your business address is simply the place where your business receives mail. It is usually acceptable to use a P.O. Box as your business address.

3. Names of Decision-Makers

Your articles of incorporation must list the names of some of your decision-makers. There are two types of decision-makers you might have to identify: incorporators and directors.

In all states, the articles of incorporation must list the names of one or more incorporators. An incorporator is a person responsible for preparing, signing and filing the articles of incorporation. Incorporators’ duties typically end once the articles are filed and a board of directors is chosen.

Some states also require you to list the corporation’s initial board of directors. The board of directors is responsible for setting corporate goals and policies and naming officers who will conduct the corporation’s day-to-day business. In a small business, the board of directors is usually made of up the business’s owners, but directors do not have to own shares in the business. Each state’s laws set a minimum number of directors—usually one to three.

4. Names of Business Owners

The owners of a corporation are known as shareholders, and they own shares of stock in the business. In your articles of incorporation, you’ll typically need to specify the number of shares of stock your corporation is authorized to issue, but you won’t have to list the names of the shareholders.

Your internal corporate records should include the names of your shareholders and the number of shares of stock issued to each of them.

5. Physical Address in State of Formation

The articles of incorporation must specify a street address within the state, and a person located at that address that can receive legal documents, notices and lawsuits on behalf of the corporation. The address is sometimes referred to as a registered office and the person at the address is referred to as a registered agent or statutory agent.

In most states, your business location can serve as the registered office, and a corporation or anyone aged 18 or over can be the registered agent. However, if you don’t have an office in the state where you incorporate, or if you prefer to have someone else act as agent for you, you can hire a professional registered agent.

Once you’ve collected this basic information, you’re ready to get started on forming your corporation. In addition to the articles of incorporation, you’ll need bylaws that will guide the way your corporation operates.

Ready to incorporate your business? LegalZoom can create and file your incorporation documents that comply with your state’s laws, and can provide you with customized bylaws for your new entity.