The most attractive reason to form a corporation is to isolate company owners from liability. Incorporating a business insulates the company’s principals from claims against creditors.
Shareholders (aka Stockholders), Officers and Directors are presumed under the law to not incur personal liability for business obligations, whereas in a sole proprietorship or partnership, company owners are personally liable for business debt, and as such, their assets may be attached by creditors.
Under each State’s laws, incorporating renders a corporation as a separate and distinct legal entity (the entity is a person in the eyes of the law).
How to Incorporate
Three basic elements are set up to incorporate: Board of Directors, Officers and Shareholders. These elements should be understood before considering how incorporating a business is undertaken.
- Shareholders own stock and are the owners of the company. Stockholders elect and remove Directors and will vote on major business decisions such as acquisition of real estate, choosing an income tax structure or entering mergers.
- Directors are responsible for general affairs including the appointment and removal of officers. A minimum of one person must serve as a Director.
- Officers are responsible for day-to-day operations and can be appointed or removed at any time by the Board. At least two Officers (a President (or Chief Executive officer) and a Secretary) are required, but normally, a Treasurer (or Chief Financial Officer) and Vice President will also be appointed. One person can fill more than one office, and can sit on the Board and be a stockholder. Accordingly, in most states, one person can incorporate a valid, legal corporation.
Articles of Incorporation are filed in the company’s domestic situs. The Articles (or application) are submitted to the appropriate governmental office (usually the Secretary of State, but in some jurisdictions, the Corporation Commission or other state-designated corporate filings department). The articles, (or application to incorporate) provide basic information including the company’s location, registered agent and its initial business purpose.
Ongoing requirements exist in maintaining corporate structure subsequent to incorporating. The Board will hold an Organizational Meeting after incorporation documents have been filed, and corporate bylaws need to be adopted. Bylaws are the governing body of rules for the business entity to operate. The bylaws supplement incorporation articles and typically set forth the frequency and manner in which meetings of the Board and shareholders will occur, under what circumstances directors and officers can be removed, and their duties.
We can prepare bylaws for you so that meeting can be held in order to approve them in as short amount of time as possible subsequent to incorporating.
Bylaws are not filed with the State when you incorporate, but are kept in the company’s Records Book. Being that they need to be approved by the Board of Directors, it is good practice to have them prepared prior to the Organizational Meeting.
Records of meetings must be maintained in the Records book. Meetings of stockholders are to be held at least annually. In these meetings, the corporation’s Bylaws can be amended and stock shares issued. It is imperative that records of these meetings be maintained. In the event of a tax audit, or in the event a creditor attempts to "pierce the corporate veil", the minutes provide evidence to the IRS, and to the Court of the corporations’ existence and propriety. Having minutes can protect you legally and serve as evidence to substantiate the legitimacy of the corporation in the event of litigation.
Annual reports are filed to maintain the corporate structure. This report discloses the names and addresses of the current officers, directors and stockholders, and if there has been any change to this information. Failure to file an Annual Reports can ultimately result in revocation of the corporate charter.
A Federal Tax Identification number / EIN is obtained by completing a Form SS-4 from the IRS. Usually the EIN is obtained simultaneously when you are incorporating. You can file the application by mail, facsimile transmission, or by calling the Teletin number listed on the instructions (the Teletin number for Nevada, California and Arizona is toll-free 866-816-2065). Within a few days of receipt, the service notifies the applicant of the employer identification number. Generally, this will happen within two to three weeks, unless the applicant telephones their information via the teletin number, in which case the EIN number is given immediately over the phone.
For a detailed look on how to incorporate in Arizona, Nevada or California, please refer to the corresponding, specific pages listed below: