WHAT YOU SHOULD KNOW ABOUT INCORPORATING
by Corporate Agents, Inc.
Copyright 1997 Corporate Agents, Inc.

From computer consultants to marketing agencies, home and office-based businesses continue to be one of the fastest growing segments of the U.S. marketplace. Professionals today are looking for the challenge and excitement of owning their own business. They are coming from a wide range of business backgrounds in search of one common thing -- being their own boss.

Entrepreneurs need to be aware of the business opportunities available to them today. Fresh ideas can be offered to the marketplace and new companies can be established by simply learning about the business options that exist and the advantages and disadvantages of each.

Choosing the Right Business Structure

Besides deciding what product or service to sell, selecting the structure within which the business will operate is the most important decision an entrepreneur will make. Basic business organization structures include sole proprietorship, partnership, limited liability company (LLC) and the corporation (including general, close and S corporation).

The business structure depends on many factors, such as the nature of business operation, the need for protection of personal assets from business debt, the intended division of earnings, need for capital, legal restrictions, number of owners and the planned life of your business venture.

Many entrepreneurs seek help with such factors. An attorney, CPA, incorporation service company, and the Small Business Administration (SBA) are knowledgeable incorporation resources. For example, more than 600 small business development centers are operated by the SBA nationwide to provide training, counseling and research to entrepreneurs.

What they learn from such resources is that a corporation is the most formal type of business structure. It is a separate legal entity owned by stockholders and provides many benefits to owners.

Types of Corporations

Anyone who operates a business may incorporate. Whether you're a one-person enterprise or a business giant, you can have the financial and tax benefits of operating a corporation.

There are four types of corporations that account for the majority of corporations formed today: general, close, professional, and not-for-profit corporation.

A general corporation is the most common option chosen by business wishing to incorporate. It is also the most formalized form of business structure. The corporation is a separate legal entity owned by stockholders, also known as shareholders. A stockholder's liability is usually limited to the amount of investment in the business and no more. General corporations may have an unlimited number of stockholders.

A close corporation is usually limited to 30 to 50 stockholders -- restrictions vary from state to state. In some states, close corporations are able to operate without the formalities and stringent record-keeping requirements of a general corporation. This type of corporation is not available in every state.

Professional corporations are formed by individuals who provide services for which a professional license is required, including but not limited to, doctors, lawyers, dentists, architects, etc.

Not-for-profit corporations are formed for specific religious, social, fraternal or similar charitable purposes. These corporations are made up of "members" who follow conditions outlined in the corporate charter and by-laws. Not-for-profit corporations are non-stock corporations and are not formed for the monetary profit or benefit of the members.

An S corporation is a special tax designation that is available to corporations which have already been formed under the laws of a particular state. General, close and professional corporations may elect the S corporation tax status. This special status eliminates the federal corporate income taxes, thus avoiding double taxation problems. S corporations must be formed within the U.S., can have only 35 stockholders or less, permit only one class of stock and require that all stockholders be U.S. residents. A recent change in the federal law governing S corporations that will alter some of these restrictions will go into effect on or about January 1, 1997. Your accountant, attorney, or corporation service company should be able to provide specific details on these changes.

8 Steps to Forming Your Own Corporation

After deciding upon the type of corporation for your business, your incorporating resource can help you complete and file the paperwork. Corporate Agents, Inc., a nationwide incorporating service company, has reduced the incorporation process to eight simple steps.

Step 1: Select a Corporate Name

The first thing any business owner must do is to choose a name for the corporation. The name must not match the name of any other company that is registered in the state of incorporation, nor can it be so similar to an existing name that it might confuse the public. A federal trademark search may also be conducted by the incorporation resource with which you choose to work.

Forming a corporation in the state in which you plan to conduct business is often the least complicated and most cost-effective choice in the long run. However, some business owners prefer the advantages of forming a corporation in a specific state, such as Delaware or Nevada.

Decide, if you have not done so already, if the corporation will be general business corporation, close corporation, a professional corporation, or not-for-profit corporation. Ask questions if you are unsure of which one to select. Also, you should decide if you will be electing the S corporation status for your corporation. Although this election is filed after the corporation is formed, IRS rules allow a limited time period to file in order to obtain the tax status for the current tax year.

There are two basic kinds of stock -- common and preferred. Common stockholders have voting rights to select directors and are entitled to share in the profits of the company. In most cases, preferred stockholders usually do not have voting rights in return for preferred rights when it comes to the distribution of dividends. The type of corporation you elect to form can, in part, help determine the classes of stock.

Once the corporation has been officially formed, the Organizational Meeting held and the By-laws have been approved, the company is almost ready to conduct business. To complete the process, you or your incorporation resource will need to order the corporate kit which should include a corporate seal, stock certificates, stock ledger, and sample minutes and by-laws. Corporate kits are generally available at business supply outlets like Staples or Office Depot and are custom-made corporate kits are available from most incorporation service companies.

Directors are the individuals who have the responsibility of managing the company and establishing the policy as stated in the corporate by-laws. Directors are also responsible for electing the corporate officers, usually during the Organizational Meeting. The number of directors required varies from state to state.

Most states require that the address of the corporation be listed at the time of incorporation. For the home-based business and entrepreneur, this address will usually be the same as their home address. This address need not always be located in the state of incorporation and, in some states, may be either a street address or post office box.

State law requires that a person or entity located in the state of incorporation be available during regular business hours to receive legal notices and other official documents. This person or entity is known as the Registered Agent. Your incorporation resource will be able to provide this service as well.

(Contact Corporate Agents at 800-877-4224, send email to: info@corporate.com, or visit their online Business Incorporation Guide at www.corporate.com)