Setting Up A Corporation
Are there restrictions as to what I can name my corporation?
Just like any other legal entity, every state has restrictions on what you can name it and most of those come from a few different areas. Number one would be you can't name anything where there's a name that's confusingly similar or exactly similar to a name of another corporation that's out there. You can always check that out by taking and reserving the name in advance or having someone do a name check first. Additionally, corporations, states like you to identify them by placing something after the name of the company. Typically it's I N C, Inc. or it's incorporated or corporation or company or corp. or some combination of that, either with or without a comma. What that does is it really identifies to individuals when you put it on a business card or on a website or on a contract that they're dealing with an entity and not with you personally. Also, many states have other regulations that would prevent you from naming a company like a bank or naming it a trust company or naming it 'Police' or naming it, you know, like the 'Federal Bureau of Investigations' or, you know, even if it's something that isn't taken in your state they don't want anything that's going to, kind of confuse you with a government entity or make people think that you might be a bank when you're not an actual bank.
What are a corporation's "articles of incorporation"?
The articles of incorporation are the formation documents; the essence, the beginning of the charter of a company. In the same way that the articles of organisation (or certificate of organisation, depending on your state) are the things that start a limited liability company, the articles or certificate of incorporation are what start up or give birth to the legal entity; your corporation. Every state's law varies as to what's required from the articles of incorporation. Many states have forms they use that delineate exactly what information what needs to go in there. So each state has their own laws, and following those, and complying with them, will give you the proper articles of incorporation and enable you start up your legal business.
How do I choose my corporation's first board of directors?
There are a few ways of choosing your corporation's first board of directors. Typically if you have someone like a lawyer or an online company that set up your corporation, they will be the incorporator; the person who formed it. However, they won't necessarily be a member of the board of directors. What will typically happen is the incorporator will have a first meeting that they will assign, where they will elect directors of the corporation. That can be 1, 2, 20, 200 people; however many you want as the board that is going to be organising and overseeing the company. Additionally, one individual can start up the company; they can start it up not as an incorporator, but start it up as a single director, and any with shareholder (if you're a sole director and sole shareholder) you can have a first shareholder's meeting and you can name additional directors then. Also, after a company's been going for a while (every year typically at an annual meeting of shareholders; shareholders are the people that typically elect directors) you can increase the number of the board, you can add new directors, and a lot of times, in the middle of a company, if someone decides to resign and there is a vacancy, the other members that are present can fill that vacancy without there being an action of the shareholders. It can just be ratified and redone at the next meeting.
What are my corporate "bylaws"?
Corporate bylaws are very similar to how the business is going to be conducted. It's very similar to an operating agreement of a limited liability company, but not nearly as detailed. Corporate bylaws set out and delineate how the directors and officers and the shareholders of the company are going to meet, how they're going to conduct business, how they'll be elected or removed from office and what the duties of certain officers are going to be. The corporate bylaws are really the document along with the articles of incorporation that set out the charter of the company. Those two documents together are like the initial building blocks for a company.
How are corporate bylaws adopted?
Bylaws are adopted generally, if you have an incorporator that sets up the business, a lot of times, the incorporator in the very first meeting will just adopt the bylaws that have been set forth. Additionally the shareholders or directors could adopt the bylaws, depending on what your bylaws say, because it depends on the state and on what your bylaws say. However the bylaws can be amended or adopted, usually it's by a majority of the shares, the shareholders can change the bylaws, or they can adopt new bylaws, or amend them, or restate them in any way. But initially, the very first set of bylaws, typically chosen by the incorporator or the shareholders in the company.
What must corporate directors do in their first meeting?
It really does depend, and I kind of hate that answer, and as a lawyer it's an answer I tend to give a lot. It depends on A: What have you done in the past that you might need to memorialize in your very first meeting minute, what you intend to do in the immediate future, what you are doing right now, and what has been done by the incorporator. So if the incorporator has already elected directors, and the incorporator has already adopted bylaws, you don't need to redo those things over again. However, if you have been running a business before you had incorporated it, and you had signed a very big, major contract with a supplier or a vendor, you might want to ratify that contract. Additionally you might want to set out the corporate bank account and authorize it, ratify any employment agreements, identify what the corporation's fiscal year is going to be, how accounting is going to be done. I mean, they're pretty endless. And what it really comes down to is you should take a look at A: Common sense -- what things do I know I need to do, and let's put those in there, and then I would always suggest talking to a legal professional -- an attorney, typically -- who would have some ideas of some other things that you might want to include in there, and if you ever have a doubt as to whether or not there is something you need to ratify, or not ratify, whether it's in a first meeting, or any meeting, an attorney would be the person who would give you that answer.
What type of bank account does my corporation require?
Well, most personal banks have personal and business services. It does definitely depend on your bank. Some banks don't really do a lot of business banking. You just need to find a bank that does provide personal business banking. You'll need to go to that bank and find out exactly what it is that they require. Typically, what a bank will require is usually three things. Number one, they're going to need a tax ID or an EIN, an employer identification number. Number two, they're going to need a legitimate member or officer or director of the corporation or limited liability company, someone who's authorized to open up the account and be a signatory for it. And then number three, a lot of times they're going to want a resolution. And that is one of the resolutions that the board would adopt that says it's OK to open up that bank account. And most of the time, a bank, when you open it up, will give you a form of resolution, and all you have to do is fill it in with the name of your company and the date that you did it. This can be done and ratified and just attached to meeting minutes that you have at your next board of directors meeting. Typically, at a very first meeting, I would state that we have the ability to open a bank account. For instance, if I knew what bank it was, I might mention it, and I would say that we have the ability and that any officer, proper officer or director, has the ability to go in and sign any paperwork on behalf of the company to make that happen. So the second signing of it doesn't require a whole another meeting. You would just go ahead and attach it and say, "This was the thing that we signed." And that makes it up and on the level, and it allows you to work a lot faster when it comes to dealing with the bank.
How do I issue stock in my corporation?
Issuing stock can be done in a number of ways, and I look at it as the initial issuances of the founders of the corporation, and then additional issuances, whether its to employees, investors, partners, vendors or whomever. So if we take these kind of two-fold; step one, the initial investors, not investors, the initial founders of a company, so if its myself and two other people and we have a company and that company has, you know, a hundred thousand shares of stock that it can issue, each of us might want to get three hundred and, you know, three hundred, or thirty-three thousand, three hundred and thirty-three shares, and one person might get the extra share or it might just go away into nothing. So that way we would all have one-third of the company and for that we would have issued some sort of capital contribution, whether its in the form of money or services that we've already rendered or propery or assests that we've contributed to the company. Now, afterwards if you want to issue stock to other people, like employees, you can do it in a number of ways. You can do it based on their service to the company, as to if they've done a proper amount and they've accordingly paid something in, in their own human capital into the comany, and you can account for that and issue them shares in the company. Also, there's a way through stock plans, option plans, people have heard of, or warrants or restricted stock. There's just a bunch of different ways that you can compensate partners and employees for stock. Now, when you do that you're gonna want to have a stock record book and a transfer book and a ledger where you can take a look at the certificates that you've signed, the one's that you've filled out and issued in a place where you'd have a copy of them so you always know what's outstanding, the dates that they were issued, the amounts, the money that was spent, and then if they're ever transferred or a portion is transferred, you have a place and a nice clean and legitimate record for it. Now, also whenever stock is issued, typically in a board meeting, you would go and you would ratify that issuance and say "Oh, you know, these stock certificates one, two, three and four were issued to names a, b, c and d."
How should I denote debts I owe friends or relatives while incorporating?
What you should do is you should always have some sort of evidence of payment. If someone, for instance, loaned you or your business ten or twenty thousand dollars, or even if it was twenty dollars, the best way to document that is through a promissory note, and there are some really easy places where you can get them; you can find them online, you can find books that tell you how to write them out, and keeping accurate records like that will always, always benefit your company. The one thing you do need to be careful about when you take or accept a loan from anyone is that you don't want it to look like a gift, and the way you do that is you have to make sure that you pay them some sort of interest. For instance, if a prevailing interest rate was five percent and your parents gave you a hundred thousand dollars to start a business with zero interest, well really every year five thousand dollars would be a gift to you because that's how much interest you would have had to pay and even compounded over the years. So you want to make sure your promissory note bears some sort of rational interst that you can relate to the market, and typically what I tell people is take a look at what a savings account is giving and give someone an extra point on it, if they're a friend. If someone's a real meany you might have to give them the maximum allowed by law.
After the articles of incorporation, will additional documents be required?
Every states different, and you should obviously check with your states laws on what documents you want to file. In addition to the articles and, the bylaws don't need to necessarily be followed, but in addition to your articles of incorporation, in any business permits or tax exempt status, or state tax sellers, resellers permits that you might want to do, you should always think about your federal and state's securities laws. So a lot of times if you issue securities in a company you might have to make a record of that and alert your state that you've issued securities in a company, so anytime that you have issued stock, that is what's called, that's a security, or any time you issue out a loan that someone can convert into stock, that's a security, and you need to check your states laws and also the federal laws, as to whether or not that security is exempt from registration, and if it is exempt, then usually there's a small filing and sometimes a fee that you have to pay that lets the state know that that's an unregistered security that didn't need to be registered, but it's out there and its been issued.
How can I transfer my assets to my corporation?
Similar to any business entity, if you want to transfer assets, that's just another way to contribute capital to a company. Transferring an asset, whether it's personal property like a computer or a desk, or real property like a building or land, is done and it's papered over and it's agreed to by the board of directors on what it's fair-market value is. So you set a fair market value for the property, and then in return for that, you need to get something back. It needs to be one of two things typically -- either a promissory note that you're going to be repaid, or some stock in the company or additional ownership in the company that would be valued at a rate. So, if you had shares that were worth a dollar a share and you put it in a company that was worth $100,000, you would want to get a hundred thousand shares of stock for that.
How do I establish that my corporation is an S corporation?
Well, in order to make your corporation an S corporation, (and just as a reminder, every corporation, when you first organize it and start it up, is a C corporation - in other words, profits that are made at the corporate level are taxed and then any dividends that are distributed to shareholders are then taxed personally to them) the first thing you have to do is figure out if you qualify. So number one, you need to take a look and find out, is this within 90 days of when I formed the corporation, or within 90 days of the next fiscal year (of the next tax year, so usually by the end of March of every year that you would have to pay taxes). So if you're eligible to file it, then what you would do is you would take form 2553 of the IRS, which is the S corp election, and you would have that filled out, you can do that yourself off the IRS website and there are companies like Legalzoom.com online where you can get, where you can have them fill those out for you, and then you would basically put down that information and file it. Now in order to be eligible, other than the time frame, you would need to make sure that you meet the minimum requirements of having less than 100 shareholders, that your corporate fiscal year ends on December 31st, that all of your shareholders are natural persons, that are United States citizens, and lastly that you have no class of preferred stock, that you only have one class of stock. If you do all of those, then your corporation, even if you file the 2553 on, you know, February 4th, the entire tax year will be treated as an S corporation.
What happens if I don't file my S corporation election on time?
All is not lost, and there is a way, through the IRS's website, and I would definitely say that you should go there, www.irs.gov, and take a look at "late S-corp election filing". The rules are that if you would otherwise meet the qualifications for filing an S-corp, but have not filed your taxes yet (providing you have some sort of reason why you forgot to file it), you file it on a particular form and there's a rule that you can go to, and all of the directions are right there on the IRS's website. Most of the time, you can actually request it late, and it will still be retroactive to the date that your corporation started or that fiscal year. Again, it's not a guarantee, but it's probably about the best shot that you have.
How do I establish that my corporation is a C corporation?
There are two ways. Number one, do nothing. Every corporation, when it's initially established is a C corporation. The other way to do it is to blow your S corp election. So, if you indeed filed a valid and became an S corporation, if you do anything that is against the S corporation rules, like have more than a hundred shareholders or change your fiscal year end date from December 31 or start having separate classes of stock or shareholders that are not U.S. citizens or shareholders that are corporations or LLCs. As soon as you do any of that for that fiscal year, you're going to lose your S corp status and you will automatically be a C corp and unless you fall back in the S corp exceptions you won't be able to re-file for S corp status in the next fiscal year.
