Documentation, fees, and typical time frames
A corporation’s formation document is typically called the Articles of Incorporation or Certificate of Incorporation, depending on the state. An LLC’s formation document is typically called the Articles of Organization or Certificate of Organization. Incorporation documents advise the state and the public of certain details concerning the company. Incorporation documents become a formal record of the corporation’s or LLC’s existence.
State corporation and LLC filing fees range widely. The typical time frame to have incorporation documents approved also varies.
Standard (non-expedited) incorporation filings can take four-to-six weeks to be approved and returned to the business owner. Most states offer expedited filing services for an additional fee, reducing the turnaround time for filing documents to a few days or even a few hours.
Mandatory corporation and LLC disclosures
LLCs and corporations must disclose certain information in their incorporation documents.
The mandatory disclosures vary slightly by state.
Company name
The desired name of the corporation or LLC must be included. For corporations, it must typically include an identifier, such as “corporation”, “incorporated”, “company”, or an abbreviation of those terms. For LLCs, it must typically include the term “limited liability company” or “LLC”. The name cannot already be on the records of the filing office as being the name of another domestic or foreign business entity. Therefore, it is advisable to do a name check to make sure the name is available and then reserve the name before submitting the formation document for filing.
Business purpose
A corporation’s incorporation document typically must include a brief statement of its business purpose declaring the proposed scope of its operations. This may also be required for LLCs in some states. Business purpose clauses are either of two types, general or specific.
General business purpose: Most states allow a general purpose clause indicating that the company is formed to engage in “all lawful business”.
Specific business purpose: Some states require a more complete explanation of exactly what type of business the company will undertake.
Registered agent
Most states require domestic and foreign corporations, nonprofits, LLCs, LPs, and LLPs to name a registered agent (sometimes referred to as a resident agent or agent for service of process), which is the party that receives and forwards important legal documents and official communications on behalf of the company.
The registered agent must have a physical address (no PO boxes) in the state of incorporation, and must be available at that address during normal business hours. Examples of important documents typically delivered to the registered agent include service of process (notice of litigation), subpoenas, garnishments, tax notices, and annual filing notices.
Incorporator
The person or company who files a corporation’s formation document is called an incorporator. The person or company who files an LLC’s formation document is generally called an organizer.
Most states require that the name, signature, and address of the incorporator or organizer be included in the incorporation documents.
Registered agent
The registered agent warrants additional discussion due to the importance of the position and the fact that not all small business owners may be familiar with what a registered agent does.
The majority of states require corporations and LLCs (as well as nonprofits, LLPs, and LPs) to appoint and continually maintain a registered agent in the state where the company is formed. A business owner has the option of serving as the company’s registered agent as long as he or she maintains a physical address in the state in which the corporation or LLC is formed and is available during normal business hours.
There are many corporate service providers who provide business entities with a professional registered agent. While they charge an annual fee, many small business owners find their services advantageous for reasons such as the fact that the registered agent’s name and address are included on the incorporation documents (instead of the owner’s), that it ensures someone is always present during normal business hours to facilitate receipt of documents delivered to the registered agent, and that professional registered agents have expertise in handling these very important and time-sensitive documents.
Many professional registered agents also provide other compliance services that can help small businesses keep track of important corporate information and provide alerts for upcoming compliance events. Some may also assist you with filing your company’s annual report, DBA filings, and business licenses, and monitor the status of your company with your state of incorporation.
Advantages of using a registered agent service provider
Stability: The registered agent address must be kept updated with the state. If a business owner serves as the company’s registered agent and moves, he or she must file an amendment or change of registered address form and pay necessary state filing fees to update the registered agent address on record for the company. Under some state laws, a failure to update the registered address in a timely manner is grounds for administrative dissolution. If a registered agent provider is used and moves, the provider will update the state.
Privacy: The registered agent’s name and address are public information. (In fact, the main purpose of the registered agent requirement is so that the public can know how to contact or serve process on the company). Some business owners want to protect their privacy and not have their addresses disclosed to the public.
Reliability: Registered agent service providers maintain fully staffed offices to receive documents served on them. They treat the receipt of these documents and prompt delivery to you with utmost professionalism.
Compliance assistance: Many corporate service providers not only provide registered agents but offer tools and services to help business owners keep their companies in compliance with both internal formalities and the ongoing filing and fee requirements imposed by the state of incorporation. Companies that do not meet their compliance requirements face the possibility of monetary fines, losing the limited liability protection offered to owners, and/or administrative dissolution of the business by the state.
Disclosure information required for corporations
The information required in corporate formation documents varies from that required for LLCs. The following disclosures are generally required.
Number of authorized shares of stock
Corporations must set forth the number of shares of stock they wish to authorize and the par value, if any, associated with those shares. A corporation need not issue the total number of authorized shares. Some opt to withhold unissued shares in order to add additional owners at a later date or to increase the ownership percentage for a current shareholder.
Share par value
Par value is the minimum stated value of a share of stock. It typically doesn’t correlate to the actual value of a share. Common par values are $0.01, $1, or no par. The actual value is fair market value, or what someone is willing to pay for a share of stock. For public companies, actual value is determined by the price investors are willing to pay for each share on the national exchange. For private companies, the actual value of a share is typically determined by the overall value of the corporation or the book value. It often makes sense to establish a low par value for shares, as a number of states use par value to calculate a corporation’s franchise tax obligations.
Preferred shares
If a corporation plans to authorize both common and preferred shares, this information, along with any information on voting rights, must be included in the Articles of Incorporation.
Preferred shares typically provide those shareholders preferential payments of dividends or distribution of assets should the company end operations. Many small business owners choose to only authorize shares of common stock. For details on preferred shares and voting rights, talk with an attorney.
Directors
Directors are responsible for overseeing and directing corporate affairs, including making major corporate decisions. However, they are not responsible for the daily business activities. They appoint the officers who are responsible.
Initial directors may be named in the Articles of Incorporation, and if so, they will hold an organizational meeting after the Articles are filed to complete the incorporation. Thereafter directors are elected by the shareholders at the annual shareholders’ meeting that all corporations are required by statute to hold.
Officers
Names and addresses of officers are generally not included in the incorporation documents. Officers are responsible for the day-to-day activities of the corporation. Common officer titles include president, vice president, secretary, and treasurer. In most states, one person can fulfill multiple roles.
Disclosure information required for LLCs
The following disclosures are generally required for LLCs.
Management structure
LLCs must typically specify whether the company will be managed by its members (owners) or by managers. When an LLC is managed by members, owners are responsible for the daily business operations.
When managed by appointed managers, it is the managers and not the members who are responsible for the daily operations.
Members/Managers
Some states require the names and addresses of the initial member(s) or manager(s) of the LLC be set forth in the formation documents.
Dissolution date
All states allow (but not all require) the LLC to list a dissolution date in the Articles of Organization, dictating the maximum duration of an LLC’s existence. Every state allows for perpetual existence.
Common information required for nonprofits
A nonprofit corporation’s Articles of Incorporation or Certificate of Incorporation resemble for-profit Articles of Incorporation, but with a few key differences:
- Nonprofits do not issue stock, so the nonprofit Articles of Incorporation will not require information on shares of stock or par value.
- Nonprofits must include very specific and detailed business purpose clauses. This information is used by the state to ensure the company fits within the nonprofit guidelines. It is also evaluated by the IRS if the nonprofit applies for federal tax-exempt status.
- The state-approved Articles of Incorporation must be provided to the IRS when the nonprofit applies for a federal tax-exempt status.
Post-incorporation and compliance requirements
Requirements imposed on corporations and LLCs do not end when incorporation documents are approved by the state — they are ongoing. Owners enjoy certain benefits from corporations and LLCs, and must fulfill responsibilities to maintain those benefits. Failing to follow requirements can result in dire consequences, including the potential loss of the limited liability protection provided to the owners.
Internal requirements
Corporations are required by corporation law to undertake certain ongoing formalities in their internal governance. While LLCs do not face the same statutory requirements, similar steps are recommended and can be required to be taken if so provided in the operating agreement.
The importance of faithfully undertaking and properly documenting each cannot be overstated. Failing to do so can result in disputes over the validity of actions taken. It can also be an indicator that the owner did not respect the corporation or LLC’s separate existence, which can lead to a loss of limited liability protection for the company’s owners if a court decides to “pierce the corporate veil”.
There are many tools available today, specifically geared towards small business owners, to make complying with internal formalities as easy and convenient as possible.
A corporation’s bylaws are second only to its Articles of Incorporation in importance. Bylaws outline the corporation’s internal governance rules, and address a wide range of internal policies and procedures — from establishing a corporation’s fiscal year and what corporate actions require shareholder approval, to outlining how many officers a corporation will have. Bylaws are adopted by a corporation’s directors at their organizational meeting.
Another item often addressed during the organizational meeting is corporate authorization to open a bank account. Some banks require a copy of a directors’ resolution approving the bank account and assigning which officers will have signature authority on it.
Corporate internal requirements
Corporations face the strictest statutory requirements of any business type. The following ongoing steps are required of corporations:
- Create and update bylaws.
- Hold an organizational meeting where bylaws are adopted, officers are appointed, shares of stock are issued to initial shareholders, and initial business decisions or steps (such as authorizing the corporation to open a bank account) are approved. Minutes outlining all actions taken at the organizational meeting should be taken and kept in the company record book.
- Hold an initial meeting of shareholders to approve the incorporation, the initial board of directors, and the steps taken by directors at the organizational meeting. Minutes outlining all actions taken should be taken and kept in the company record book.
- Hold and properly document meetings of directors and shareholders (or actions taken by consent without a meeting if permitted). Every corporation is required by the corporation statute to hold an annual shareholders’ meeting. At their annual meeting, shareholders undertake the renewal of directors’ terms and/or appointment of new directors. They also vote on other matters that are properly raised and can get an update on the status of the corporation from the management.
- Directors make their decisions at duly held and noticed meetings. Minutes outlining all actions taken at the director’s meeting should be taken and kept in the company record book.
- Record changes in company ownership in a stock transfer book or ledger.
Internal LLC recommendations
While LLCs are not required to follow ongoing formalities by the LLC statutes, undertaking the following steps is typically recommended:
- Create and regularly update an operating agreement. An operating agreement is an LLC’s most important document. Some states require LLCs to adopt an operating agreement. Some further require it to be in writing. Regardless of the statutory requirement, it is advisable for all LLCs, even those solely owned, to have a written operating agreement. An LLC’s operating agreement outlines the internal governance of the LLC, the rights, duties, responsibilities, and liabilities of members and managers (if any), and much more.
- Hold an initial meeting of the members or managers to approve the operating agreement, issue membership interest to members, and undertake initial company decisions, such as authorizing the LLC to open a bank account. It is also recommended that the actions taken at this meeting be documented and kept in a company record book.
- Hold and properly document the actions taken at meetings of members or managers.
- Record any changes in ownership (membership) interest in a transfer book or ledger.
External compliance requirements
External (compliance) requirements are imposed by the state corporation and LLC laws on corporations and LLCs. They often include an annual or biennial state filing and payment of a corresponding state fee.
Nearly all corporations and LLCs must file periodic reports with the Secretary of State’s office or the equivalent department. Annual statements are the norm — but some states have relaxed their rules and require only a biennial statement. In either case, states typically impose a fee along with the filing. The fees vary widely by state and by entity type.
Some states also impose a franchise tax — levied for the privilege of existing as a corporation or LLC that is incorporated or registered to transact business in that state. A franchise tax may be based on income, assets, outstanding shares, or a combination. It might also be a flat fee.
The due dates for annual statements and franchise taxes vary by state. Some states connect these dates to the anniversary of the company’s incorporation (or date it registered to transact business in the state, in the case of annual statements and franchise tax imposed on foreign qualified companies). Others set a particular due date for all corporation annual statements and another for all LLCs. Because the periodic filing requirement and annual franchise tax can represent a significant burden and expense, business owners should research these requirements prior to incorporating.
Additional external requirements
Here are some other potential state and federally imposed requirements that may apply to your company:
- Filing a federal income tax return and paying necessary taxes. (Corporations and LLCs taxed under Subchapter C)
- Filing a state income tax return and paying necessary taxes. (Corporations and LLCs taxed under Subchapter C)
- Payroll tax obligations (such as social security, Medicare, and unemployment).
- Property tax obligations.
- State sales and use tax obligations.
- County, city, or municipality tax obligations.
- Obtaining and renewing any necessary federal, state, and/or local business permits and/or licenses.
- Registering assumed names (DBA) if the company will be doing business under a name other than its legal name.
Consequences of non-compliance
Small business owners should be aware that failing to observe internal and external requirements can yield dire consequences, such as having to pay additional fees and penalties, losing good standing status, and loss of the limited liability protection provided to the company’s owners.
A corporation or LLC that does not comply with certain state requirements, such as the annual report or franchise tax requirements, can lose its “good standing” status with the state. Each state has different parameters for what is required before a company falls out of good standing and also how the states handle it. For example, as a first step, many states impose late fees and interest payments on the outstanding annual statement and/ or franchise taxes or fees.
The Secretary of State (or similar office) may refuse to file documents on behalf of corporations or LLCs not in good standing. Banks and lenders also generally require proof of good standing before making loans. And being out of good standing long enough may lead to administrative dissolution of the company by the state. When the state administratively dissolves a corporation or LLC, the corporation or LLC is not allowed to conduct its usual business and must wind up its affairs and eventually liquidate.
If the owners decide they don’t want to wind up and want to continue in business, they may be able to file an application for reinstatement. This requires the payment of all back taxes, filing reports that are due, and paying interest and penalties.
Piercing the corporate veil
Every state corporation and LLC law states that the corporation or LLC has its own separate legal existence and is liable for its own debts and other obligations. They also provide that shareholders and members are not liable for the corporation or LLC’s debts and obligations.
However, while the statutes provide for liability protections, courts (using their equitable powers) can under certain circumstances ignore the corporation or LLC’s separate existence and hold the owners liable for business debts.
The term “piercing the corporate veil” refers to a court’s decision to sidestep statutory liability protection normally afforded by a corporation or LLC and impose personal liability upon the owners. A close corollary rule is the alter ego theory, which essentially says that if the owners disregard the legal separateness of the corporation or LLC, the law will also disregard the corporate or LLC form to protect creditors.
Among the factors courts look at in determining whether the owners have disregarded the legal existence of the corporation or LLC is whether they followed management formalities, such as holding meetings and documenting actions taken, and following statutory compliance requirements. Although other factors typically are more persuasive, such as whether the corporation or LLC was undercapitalized and whether the owners used the company’s assets for personal purposes, it is still helpful if the owners can show they followed external and internal requirements.
Courts have long recognized the distinct legal status of liability-shielding entities. And courts are reluctant to disregard the corporate or LLC status — though they will pierce the corporate (or LLC) veil in appropriate circumstances, particularly when the court believes failing to pierce will result in injustice or unfairness to the plaintiff.
Using an incorporation service provider
Using an attorney to incorporate a business is not a legal requirement. Business owners can use an online incorporation service provider or incorporate on their own directly with the appropriate state agency.
Using an incorporation service provider has become the incorporation method of choice for many small business owners. They are less expensive than using an attorney, and using a service provider is typically less time-consuming and less confusing than preparing and filing one’s own incorporation documents.
Keep in mind, incorporation service providers are not law firms and cannot provide legal advice. They can, however, provide general information on business structures and state requirements, and walk you through the incorporation process step by step.
Benefits of using an incorporation service provider
Save time: When business owners personally prepare and file their formation documents, they often spend more time than anticipated or desired to research state requirements and fees and obtain, complete, and submit appropriate documents.
Save money: Using an attorney or an accountant to prepare and file formation documents is another option. But it can often be quite expensive, particularly for new business owners who need all of their spare capital to start operations. If a business owner needs the advice of an attorney on an entity type or where to incorporate, a provider can still be used for the actual preparation and filing of the incorporation documents. This helps save money, since the owner is only paying the attorney’s hourly fee for advice, and not for time facilitating the incorporation process.
Make incorporation understandable: Many incorporation service providers want to help business owners understand the business type choices available to them, the process of incorporation, and ongoing requirements. Look for a provider with articles and tools to help make learning easy.
Comprehensive offerings: Incorporation service providers typically charge a service fee plus the state filing fee in order to prepare and file your incorporation documents. Many offer additional products and services (often as part of incorporation packages) that business owners typically need when starting and/or incorporating a business. Additionally, many offer filings and other services business owners often need throughout and/or later in the life of their business, such as ongoing compliance assistance, registered agent service, business license, and doing business as (DBA) filings.
Professionalism: When choosing an incorporation service provider, ensure that the company’s contact information and customer service hours are easy to find. Look for customer testimonials and membership seals demonstrating that the company belongs to organizations that promote good business practices. Also, because most incorporation service providers offer online ordering, check for a privacy policy and ensure that the checkout process is secure.
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