The ABCs of Incorporation

If you’re like most small business owners, then you’ll likely retain full ownership and control of your company during its earliest days of operation. However, your ultimate goal is to find success and make your business profitable. As that happens, new roles and responsibilities will be shifted to you. These can quickly become overwhelming without having a partner or partners to relieve the burden. Yet bringing partners into your business brings with it an inherent risk. In a general business partnership, the actions of an individual partner must be answered for by the entire ownership team. This opens the door for creditors to potentially come after you and your own personal assets to resolve your partners’ liabilities. It’s the potential of such liability concerns that prompts many in your position to choose to incorporate when bringing on new partners. By forming a limited liability corporation, you protect your personal wealth from your ownership role in your company.

Advantages of Forming an LLC

Forming an LLC officially turns your business into its own stand-alone legal entity. This not only brings with it the advantage of individual protection from corporate liability claims, but it also may free you from having to worry about paying taxes on your company’s profits. Instead, you can pay yourself and your ownership team a salary out of those profits, from which you would only need to pay personal income tax. You’d only have to worry about corporate taxes if you had any money left over after paying out your salaries and overhead expenses.

Detailing the Incorporation Process

However, incorporating is a well-defined process that must be followed to the letter in order for you, your partners, and your company to enjoy all of its benefits. The steps that must be taken to form your LLC are as follows:

• You need to file your articles of incorporation with the secretary of state’s office for the state in which your company is headquartered. Depending upon the size of your business, this can be a relatively simply process. In some instances, your local secretary of state can provide with nearly completed documentation that only requires you to enter your company’s name and contact information, as well as general information regarding your company’s ownership. When you submit these forms for review, you’re also required to pay a filing fee.
• Along with submitting your articles of incorporation, you must also create corporate by-laws that detail how your organization is to be run. The by-laws should include:
  • A proposed schedule for shareholder meetings
  • Record-keeping standards for important meetings attended and decisions made by your ownership team
  • Plans detailing your handling of company finances and your submission of tax returns for the corporation
  • Your proposed methods for keeping corporate assets separate from the personal funds of your ownership team
• Stock must also be issued to all of the members of your ownership team before you can qualify for incorporation.

Emphasizing the Importance of Following Your Corporate By-Laws

Adhering to the by-laws that you created while incorporating is vital if you wish to retain the personal protection your LLC provides. A failure to do so could cause authorities to question whether or not your business is truly in individual entity, or rather an extension of yours or your partners’ own personal interests. For example, if you underfund your corporation, or you do not maintain detailed records of all of your business’ transactions, then who is to say if you are handling company assets properly or using them for your own personal reasons? If it’s suspected that this is the case, your corporate status could potentially be revoked. Incorporating could very well be the best decision you ever make in guaranteeing the long-term stability of your company. However, like all ventures that you choose to undertake relative to your business, this is one that requires the commitment by you and your partner’ to follow the requirements of incorporation. Doing so will not only protect yourself if and when financial challenges arise, but it will also put your company in a better position to deal with them.

Legal Disclaimer

The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.