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Incorporating a Small Business
Incorporating a Small Business
If you are the owner-manager of a small business you may have been wondering about the advisability of incorporating your business, particularly if you are seeking equity capital.
This Management Aid does not discuss the advantages and disadvantages of the corporate form; its purpose is to acquaint you with some of the basic steps involved once you have decided to incorporate.
This Aid is not to be considered a substitute for professional advice.
Legal guidance will insure that (a) the articles of incorporation and the
bylaws are tailored to the needs of your particular business enterprise,
Laws governing the procedure for obtaining a corporate charter vary among States. Detailed information about the requirements of your State can be obtained from the secretary or other official designated to supervise the granting of corporate charters.
Choosing the Location
The majority of small and medium-sized businesses, especially those whose trade is local in nature, find it advisable to obtain their charter from the State in which the greatest part of their business is conducted.
Out-of-State, or "foreign," incorporation often results in the additional payments of taxes and fees in another jurisdiction. Moreover, under the laws of many States the property of a foreign corporation is subject to less favorable treatment, especially in the area of attachment of corporate assets. This legal difference could prove especially hazardous to a small business.
On the other hand, you should look into possible benefits to be gained from incorporation in another State. Such factors as State taxes, restrictions on corporate powers and lines of business in which a company may engage, capital requirements, restrictions upon foreign corporations in your State, and so forth should be taken into consideration in selecting the State of incorporation. For example, you should be aware that some States require a foreign corporation to obtain a certificate to do business in their State. Without such certification the corporation may be deprived of the right to sue in those States.
The fee or organization tax charged for incorporation varies greatly from State to State.
Certificate Of Incorporation
Generally, the first step in the required procedure is preparation, by the incorporators, of a "certificate of incorporation." Most States used to require that the certificate be prepared by three or more legally qualified persons, but the modern trend is to require only one incorporator. An incorporator may, but not necessarily must, be an individual who will ultimately own stock in the corporation.
For purposes of expediting the filing of articles, "dummy" incorporators are often employed. These dummy incorporators are usually associated with a company that performs this service or with an attorney for the organizers. They typically elect their successors and resign at the meeting of the incorporators.
Many States have a standard certificate of incorporation form which may be used by small businesses. Copies of this form may be obtained from the designated State official who grants charters and, in some States, from local stationers as well. The following information is usually required:
Officers and Stockholders
Next, the stockholders must meet to complete the incorporation process. This meeting is extremely important. It is usually conducted by an attorney or someone familiar with corporate organizational procedure.
In the meeting the corporate bylaws are adopted and a board of directors is elected. This board of directors in turn will elect the officers who actually will have charge of the operations of the corporationfor example, the president, secretary, and treasurer. In small corporations, members of the board of directors frequently are elected as officers of the corporation.
The bylaws of the corporation may repeat some of the provisions of the charter and State statute but usually cover such items as the follows:
Special Tax Laws
At the time of the first meeting of the corporate board of directors and
prior to issuance of any shares, you might consider adoption of a plan
under a section of the Internal Revenue Code (IRC 1244) that grants
ordinary rather than capital treatment of losses on certain "small business
stock." Among the requirements of qualification as "section 1224 stock" are
You should be aware, also, of the possibility of electing subchapter S status (IRS 1371-1379). The purpose of subchapter S is to permit a "small business corporation" to elect to have its income taxed to the shareholders as if the corporation were a partnership. One objective is to overcome the double-tax feature of the present system of taxation of corporate income. Another purpose is to permit the shareholders to have the benefit of offsetting business loses by the corporation against the income of the shareholders.
Among the qualifying requirements for electing and maintaining "subchapter S" eligibility are that the corporation has no more than 10 shareholders, all of whom are individuals or estates; that there be no nonresident alien shareholders; that there be only one class of outstanding stock; that all shareholders consent to the election; and that a specified portion of the corporations receipts be derived from actual business activity rather than passive investments. No limit is placed on the size of the corporations income and assets.
If you plan to transfer property to a corporation in exchange for stock, you should realize that such a transfer is a taxable transaction unless the transfer complies with the provisions of IRC section 351.
If your business is at present a sole proprietorship or partnership, you will need to secure a new taxpayer identification number and unemployment insurance account. You should find out in advance whether present licenses and leases will be transferable to the new corporate entity.
4hb.com and Icemall.com are not responsible for the creation, accuracy or application of the material presented herein (Reports and other related offers/products). The reader is advised to seek legal counsel before starting any business or implementing any ideas contained in these documents offered free of charge.
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