Best Time to Incorporate
The Best Time to Incorporate
The best time to incorporate for almost any business owner is when:
- They first start the company
- When an existing Sole Proprietorship or General Partnership starts earning revenue or has any interaction with the public.
- The company operates in a highly litigious industry. For example, construction, consulting etc.
- You want to take advantage of the many tax benefits of a corporation.
- You want to take advantage of the following benefits of the corporate structure:
- Limit personal liability of officers and owners
- Protection of personal assets from the business
- Protection of corporate assets from the owners and officers
- Building a separate business credit profile
- Raise of capital
- Soliciting investors
- Lowering of your tax liability
- Development of a strong corporate image
- Lowering the risk of a tax audit
After the Corporation is formed
Every state has a requirement that you need to maintain specific documents for your corporation each year. In every state there has been case law that shows owners of businesses who failed to maintain these corporate records and had their personal assets at risk because the corporation was deemed invalid.
It’s often heard from aowner, “I thought a corporation was there to protect my personal life no matter what.” Well, sorry to those dreamers who feel this way. Remember, there is no such thing as a free lunch.
If you are going to form a corporation and want the protection and tax savings the corporation provide, you must do something in order to maintain those privileges. As in any relationship whether it is marriage, children, friends, employees, you have to work at keeping the relationship strong. It doesn’t just happen automatically because you get married or have a child.
With a corporation, the key areas that you need to maintain in most states are:
- Annual meeting minutes of the shareholders
- Stock ledger and stock certificates issued with shares to each shareholder
- Resolutions that track the activities of the corporation
- Annual tax filings
Most business owners understand the need for these items, but aren’t sure how to track them or put them together.
The Corporate Structure
A corporation is made up of a few essential documents. These documents determine the laws, guidelines, procedures and format of how a corporation/LLC is put together, operated and dissolved. These documents are:
State Statutes – Laws developed by each state that govern how a corporation or LLC can operate in their state.
Articles of Incorporation – The document that is filed with the Secretary of State in order to form the corporation. It indicates the name of the company, number of shares, etc.
Articles of Organization – This is the LLC equivalent to Articles of Incorporation.
Bylaws – The bylaws in most states do not need to be filed with the Secretary of State. The bylaws are the corporation’s requirements for running the business. Among others, they talk about officers, how they are elected, when meetings will be held and how voting of the shareholders will take place.
Operating Agreement – This is the LLC equivalent to Bylaws.
Stock Ledger – The stock ledger is where all names of shareholders must be recorded. Each transaction of a stock certificate is written down in this booklet.
Stock Certificates – The Corporation’s paper that represents the number of shares owned by the shareholder written on the Certificate.
Certificates of Ownership – The LLC’s paper that represents the percentage of ownership by the members of the company.
Resolution – A resolution is a written document that provides permission for a corporation to perform a specific task. The permission is granted by either a Director or Officer, depending on the activity.
The One Person Corporation
Whether you have 1,000 employees or if the company is just you, maintaining this structure will be critical to the success of your business.
Too often entrepreneurs do not see themselves as shareholders of their company, yet they frequently say they are the owners. By running your business from the shareholder’s perspective you need to step away from the Officer, Manager, and Employee mentality.
There are a few questions all entrepreneurs must ask themselves to better understand how to separate the shareholder, the director, officer, manager and employee even when they are all the same person. The questions are:
- Am I earning a consistent salary from the business?
- Could I earn a greater salary working for someone else?
- Is the company creating equity? Is it worth more each year?
- If I were just an investor looking at this business, would I invest?
- If I did invest in the business, am I happy with my return on investment?
- As a shareholder, am I happy with the decisions the officers and managers are making?
- As a shareholder, am I happy with each employee I have?
- If I invested my money that I put into this company somewhere else, would I have received a better return?
- If I invested my time with another company would I have received a better return?
Each of these questions forces you to start thinking about how you should operate your company from the shareholder point of view, not a mixed viewpoint of a manager, shareholder and officer.
The Corporate Structure as outlined by Delaware is comprised of stockholders, directors and officers.
One person can fulfill all roles.
◦ Owners of the company. They do not manage the company.
◦ Stockholders determine corporate decisions because they elect and remove directors, approve (or disapprove) amendments to the articles of incorporation, and vote on major issues.
◦ Manage the business of the company.
◦ They make only the major business decisions.
◦ They supervise and appoint the officers who make the day-to-day business decisions.
◦ They decide on dividends to the stockholders.
◦ Directors issue stock in the company.
◦ They may own stock in the company.
◦ Directors must act in the best interests of the company and its stockholders.
◦ Directors may make decisions and participate in either pre-announced meetings with a quorum or without a meeting by unanimous written consent of all directors.
◦ Directors cannot give or sell their votes to another Director or vote by proxy.
◦ A major stockholder can remove or replace by majority vote of the stockholders.
◦ Work for the board of directors and handle the normal business of the company.
◦ Officers are appointed directly by the board of directors.
◦ They carry out the decisions of the Board and implement its policy.
◦ Officers include the President, Vice President, Secretary, and Treasurer. The Board is allowed to appoint other officers as it deems suitable.
The LLC Structure, as outlined by Delaware, includes the following:
◦ Carry out policies and perform day-to-day operations of the company
◦ Supervise daily operations
◦ Hire employees
◦ Create the long-term goals and policies
◦ Not involved in daily activities
◦ Appoint and remove management
◦ Owners of the corporation
◦ Do not possess power in daily decisions
◦ Similar to shareholders in a corporate structure
Being an Employer
Once you have your corporation filed you will want to file for an Employer Identification Number (EIN). When you open a bank account they’ll want the EIN and if you start paying employees (including yourself) you’ll need the EIN. The EIN is also referred to as a federal tax identification number (TIN).
The United States government needs this in order to recognize a business entity. The best way to describe an EIN is to think of it as a social security number for a business. This allows the Internal Revenue Service (IRS) to identify taxpayers so that the IRS will know who has to file business tax returns. Whether you operate as a sole proprietor, corporation, partnership, non-profit association, or any other business entities, you will need an EIN or a TIN.