Many times I have learned of current businesses operating as corporations, only to discover that the owners have not taken further steps to solidify the legality of their corporate entity. What do I mean by this? To start-up as a new corporation, the process is actually fairly easy if you have a bit of time.
In most states (and again, my specific comments are limited to the State of California, as I am licensed here), as in California, the process begins with checking to confirm that the name you wish to utilize is not taken. In California, you have two basic options: either "wing it" by looking at the Secretary of State's website and making your own determination whether the name is available or not, or send a letter to the Secretary of State specifically requesting a response that the name is available (or not), and reserving the name. This process is simple, and can be done within 1 hour - 10-15 days (depending on whether you go with the "wing it" option or reserve option).
Once you confirm the name, you prepare and file a document known as the corporation's Articles of Incorporation. In California, there is a $100 filing fee if by mail, an additional $15 "over-the-counter" filing fee - which means that if you wish to walk your Articles into the Secretary of State's office, you'll pay an additional $15, but save 2-3 weeks off the filing date confirmation. In California, you may also file through a service known as "Expedited Filing", pay an additional $250-$750, and obtain confirmation that your Articles were filed (or rejected) within 1 day - 1 week. If you skip the Expedited Filing service, you'll hear back about the filing within 3-4 weeks, sometimes longer.
The Articles document is a simple 1-2 page document that gives basic information about the type of business you are incorporating - name, address, agent for service of process, number of shares, etc. It can, of course, be more specific and detailed, but most small businesses do not require such specificity. In addition, California has samples posted on its website, so the process is very straight forward.
Once you have filed the Articles, and get confirmation of same, your business is "active" in the eyes of the Secretary of State. However, the business requires further documentation before it is "legal". First, the corporation must have its own Bylaws. While most bylaws are similarly drafted, each corporation is different, and thus, bylaws should be drafted only by an experienced attorney. Think of bylaws as the instruction manual for your business' legal operation as a corporation. The bylaws identify the type of business, the purpose, the process of appointing directors, officers, and how much power each shall have. The bylaws do not usually provide information pertaining to how shareholders can sell their respective shares to someone else, however. Thus, other documentation (a stockholder agreement or buy-sell) should be considered.
The next item of business is usually the filing for a Tax Identification Number (TIN). The TIN will allow the corporation to open a bank account in its name, hire employees, file tax returns, etc. The IRS website is fantastic in walking through new business owners in the TIN application process, which can be completed online through its website, with confirmation immediately. Finally, within 90 days of filing, the new corporation must file a Statement of Information with the Secretary of State, basically showing that the new corporation is active and functioning as a business, and identifying the initial directors and primary officers of the business.
Most corporations that I see which were formed without the assistance of legal counsel have successfully filed the Articles, have a simple "canned" set of Bylaws, and have obtained the TIN. Unfortunately, many of these corporations, especially small 1-10 owner corporations, do not follow through with the remaining requirements for operating a corporation: namely, the annual holding of both shareholder and director meetings, and the drafting of annual minutes of such meetings.
Whether you decide to form a corporation or any other legal business entity, my strong recommendation would be to speak with an attorney before proceeding, as each corporation is different. I will discuss maintaining the corporate entity soon.
What are your thoughts? Have a great day!
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