During this 30-minute presentation, Chugh, LLP Attorneys Varduhi Danielyan and Rajashree Rajasekaran, along with Executive Director Shailesh Patel, discuss the corporate registration process for start-ups.
What is a Corporation?
Corporations have a few distinct features that distinguish them from other types of business entities, including:
- Separate legal personality: Corporations have some of the same rights as people, such as owning property, suing, and being sued, and entering contracts.
- Delegated management: The company is controlled by the board of directors.
- Shared ownership interests are tied to retained earnings and assets.
- Owners can transfer their interests.
- Limited liability: Owners are not personally liable for the actions and debts of their businesses.
Many of these factors are attractive to entrepreneurs.
Key Corporate Formation Steps
To form your corporation, you’ll need to undertake a few required steps. It is important to seek the advice of an experienced attorney during every phase of the formation process.
- Choosing a jurisdiction for your business: Your choice of state to incorporate in can have a multitude of tax and legal consequences. Many business owners should choose to incorporate in the state where they primarily operate, while others may consider external states for a variety of reasons.
- Choosing a business name: Entrepreneurs will need to choose a name for their company based on the local state guidelines where they incorporate.
- Drafting articles of incorporation: You must file these legal documents with your local government to establish your corporation. Articles of corporation contain general information such as your business name and location.
- Creating bylaws: Bylaws establish the governing rules that your corporation will follow on a day-to-day basis.
- Creating a shareholders’ agreement: This agreement, created by the company’s shareholders, outlines how a company should be operated and what shareholders’ rights and obligations are.
Choosing a Jurisdiction for your Business
Business owners should consider a few factors when selecting a state for incorporation:
- Where the business will primarily operate: For many businesses, it makes the most sense to incorporate in their home state. This is because there are administrative and tax burdens associated with incorporating outside your home state.
- The laws and regulatory environment of the state.
- Courts: Certain businesses that expect to face complex litigation may want to incorporate in states that have specialized business courts, such as Delaware.
Choosing a Business Name
The requirements for your business name vary by state. However, certain commonalties exist across states. You must choose a business name that contains one of the words “corporation,” “incorporated,” “company,” or “limited,” or one of the associated abbreviations. Also, the business name be distinguishable from other businesses or nonprofits incorporated in the state.
To reserve your company name, you will need to:
- Check availability on your local Secretary of State website.
- Reserve the name.
- File a request form.
- Consider trademark registration. This is a separate process filed through the United States Patent and Trademark Office (USPTO).
Drafting and Filing Articles of Incorporation
Articles of incorporation are official documents that establish your business with your local government body.
These documents must contain information including:
- Your company’s name.
- Type of business entity.
- Number and type of authorized shares, including the number of shares in each stock class, and the privileges and rights of each class.
- Registered office and the name of your registered agent.
- Each incorporator’s name and address.
The following information is optional, and not required, for your articles of incorporation:
- The initial directors’ names and addresses.
- The purpose that the corporation operates for.
- Par value, or the value of a single common share of the organization, for authorized shares.
- Provisions on indemnification of a director or officer, or reimbursement for legal costs and judgements incurred due to their role in the company.
- Provisions that would typically be included in bylaws.
After preparing the articles of incorporation, the owners must sign the document and then submit to the Secretary of State along with the required filing fee.
Bylaws govern a corporation’s operation and management. They are generally more detailed and provide greater guidance than articles of incorporation. Bylaws often do not need to be filed with any governmental authority.
Bylaws typically cover topics like:
- Board and shareholder meetings.
- The board of directors’ authorized committees.
- How to transfer ownership interests, and what limitations are involved.
- Winding up and dissolving the business.
Licensing and Permits
When starting out, corporations will need to obtain a general business license before registering with the state’s department of revenue or other taxation authority. Corporations also need to register with state agencies, including those that handle unemployment and worker’s compensation.
Employer Identification Number (EIN)
Corporations must obtain an Employer Identification Number (EIN) for tax purposes and to conduct transactions, such as opening a bank account. The application process for an EIN is available online.
If a business is operating in states outside of its state of incorporation, it may need to register as a foreign corporation in those states. The requirements for registration as a foreign corporation vary by state, but usually include things like conducting operations, establishing an office, making sales, and more within that state.
Corporations must comply with corporate governance requirements for their state. These can be laid out during an organizational meeting. At the organizational meeting:
- Officers are appointed.
- Bylaws are adopted.
- Individuals gain authority to open bank accounts and pay company debts.
- And more.
If a corporation does not maintain corporate formalities, it could be dissolved, or its actions could be invalidated. Additionally, the corporate veil could be pierced, which means that shareholders can be held personally responsible for the company’s debts and obligations.
For help with registering your corporation, choosing an entity type, corporate compliance, and other start up issues, please contact your trusted Chugh, LLP professional.