In order to incorporate a business, you must file company formation documents with the state government. Unlike a sole proprietorship or general partnership, both of which are formed as soon as the owner or owners conduct business, a corporation or LLC must be created with the state, and each state has its own incorporation requirements. This article outlines the most commonly requested elements.
Articles of Incorporation
Regardless of whether you are forming a C-corporation or an S-corporation, the company formation document is called the Articles of Incorporation or Certificate of Incorporation. This document provides the state with necessary information on your business. The information included in the Articles of Incorporation is a matter of public record, meaning that anyone can access it.
Company formation – what you’ll need
While the information required can vary greatly by state, there is common information that most states require to be included in the Certificate of Incorporation, including:
Corporate name. Your desired name must be included, typically with a corporate identifier, such as “Corporation,” “Incorporated,” “Company,” or an abbreviation, such as “Inc.” You may want to conduct a preliminary name availability search before submitting the Articles of Incorporation. If you incorporate online, the incorporation service you purchase will typically include this. Remember that the state holds final approval rights to ensure that a name is not already in use or “deceptively similar” to one in use.
Some states accept a general-purpose clause, indicating that the company is formed to engage in “all lawful business.”
Some states require a more complete explanation of the products and/or services your company will provide.
Virtually all states require corporations to have a registered agent in the state of incorporation. The registered agent receives important legal and tax documents for the corporation, must have a physical address (no P.O. Boxes) in the state of incorporation and be available during normal business hours. Many business owners use a registered agent service provider to ensure important documents are professionally and discreetly handled and because of the other compliance services they provide.
This is the person or company preparing and filing the Certificate of Incorporation with the state. Most states require the incorporator’s name, signature and address to be included. If you incorporate online, the incorporator will be a representative of the incorporation service provider.
Number of authorized shares of stock
Corporations must outline the number of shares of stock they wish to authorize. All corporations (no matter how small) have stock—it represents ownership in a corporation. As you consider how many shares to authorize, remember that a corporation does not need to issue the total number of authorized shares. Some hold unissued shares in order to add owners later or increase the ownership percentage for a current shareholder. Some states determine franchise taxes based on shares outstanding so consider this before issuing large amounts of stock.
Share par value
The par value of a share is its minimum stated value, and typically doesn’t correlate to the actual value. Common par values are $0.01, $1.00 or no par. The actual value of a share is its fair market value, or what someone is willing to pay for it. For public companies, actual value is determined by the price that investors are willing to pay for each share on a national exchange. For private companies, the actual value is typically determined by the overall corporation value or book value.
If a corporation plans to authorize both common and preferred shares of stock, this must be included (along with voting rights information) in the Articles of Incorporation. Preferred shares typically give shareholders preferential payments of dividends or distribution of assets, if the company ends operations. Many small business owners only authorize shares of common stock. For more details on handling shares, it’s wise to talk with an attorney.
Many states require the names and addresses of the corporation’s initial directors in incorporation documents. Directors are responsible for overseeing the corporation’s affairs, including major corporate decisions. They are elected by shareholders and responsible for appointing officers.
Officers—such as president, vice president, secretary and treasurer—are responsible for the corporation’s day-to-day activities. While inclusion of officer information is optional in many states, some require it.
Legal address of the company
Supplying the legal or principal business address is optional in many states, but some require it.
Photo Credit: Self Employment Tax Form – Schedule SE by PT Money on Flickr