Business Organization — Business Formalities
Now that you have selected or narrowed down the business entities that
fit best with your business purpose, you still have a lot more decisions
to make. That is; which state to incorporate in, proper agreements to
file with the state and internally, what formalities your business will
have as well as other important considerations.
The following is a list of formalities for filing various business entities,
which should be adhered to. This is not a full list of every business
entity filing formality! Namely listed here are major formalities.
- Articles of Incorporation
- Other Business Formalities
Keep reading below to learn more about each of these formalities.
What state is right for me?
At times, the proper state to file a business entity is the state that
your business is incorporated in (home state incorporation). Other times,
where your state isn't as "business friendly," it is best
to originally file your business out of state and obtain an in-state license
to operate or file as a foreign corporation in the state your business
is in. Keep in mind, in this circumstance you must follow the rules and
ongoing requirements of the state you filed in and the state you obtain
a license to operate in. You should make sure the benefits outweigh the
costs when doing this (this may be great for a larger business and only
a burden to a smaller business).
To determine which filing process is right for you, you must first have
a business entity chosen and look at your state laws in regards to your
business, personal and tax objectives (its often a great idea to consult
a tax professional or accountant for this as well).
If you decide on incorporating out of state and obtaining a license in
state two great business friendly states to incorporate in are Delaware
Some advantages to the Delaware Corporation are as follow:
- Delaware's business laws are some of the most flexible in the whole
- The Court of Chancery focuses solely on business law and uses judges instead
- Corporations do not have state corporate income tax when formed in Delaware
but do not transact in the state. In other words, if you have a Delaware
corporation but do business in a different state you bypass paying income
tax in Delaware (however there may be a franchise tax applicable).
- There is no personal income tax for non-residents.
- Shareholders, Directors and Officers of a corporation do not have to be
residents of Delaware.
- Members or Managers of an LLC do not have to be residents of Delaware.
Some advantages to the Nevada Corporation are as follow:
- Nevada has no state corporate income tax and imposes no fees on corporate shares.
- There is no personal income tax or any franchise tax for corporations or
LLCs (but initial and annual statement fees and business license fees apply).
- Shareholders, Directors and Officers of a corporation do not have to be
residents of Nevada.
- Members or Managers of an LLC do not have to be residents of Nevada.
In all, your professional objectives and your business purpose need to
be looked at to decide whether you should incorporate in you home state
or choose one of the business friendlier states such as Delaware and Nevada.
Articles of Incorporation
If you have decided to incorporate as a C corporation or an S corporation
you will need to file Articles of Incorporation with your business entity
state filing. The Articles of Incorporation are sometimes referred to
as the Certificate of Incorporation or Corporate Charter. This document
delineates the primary rules governing the management of the corporation.
The Articles of Incorporation are also the first set of documents that
describe how your company will run as well as many other detailed aspects
of operation. Therefore it is
crucially important that this document is drafted properly and affords you the greatest
protecting as the incorporator/president of your new corporation.
The Articles of Incorporation is the basic charter of a corporation, which
spells out the company's name, basic purpose, incorporators, amount
and types of stock, which may be issued, and any special characteristics
such as non-profit status.
The following is what you should generally include in the Articles of Incorporation:
- The organization's specific purpose.
- Duration of the corporation's existence (often perpetuity).
- Location of the organization's office.
- Number, names, and addresses of the initial board of directors.
- Whether or not this is a membership organization.
- Provisions for distribution of assets when the corporation is dissolved.
While the name of the corporation or the duration may be straightforward,
provisions for distributions of assets, issuance of stock and even implications
for choosing a membership organization type may not be as straightforward.
It is best to advise a licensed attorney on the more complicated matters
of the Articles of Incorporation.
Once your corporation is filed and approved by the state, the next crucial
and maybe the most important set of documents to draft are the corporate
bylaws, which are internal rules of a company or organization. Bylaws
outline in writing the day-to-day rules for your organization and provide
comprehensive guidelines to keep business running smoothly.
Every set of bylaws should be specific to each organization, but the basic
components of bylaws are as follows:
- A corporation name, purpose and office location(s).
- What the composition of the Board of Directors will be (numbers: min/max),
what they are required to do, how the positions are filled, etc.
- What the composition of the Officers will be (numbers: min/max), what they
are required to do, how the positions are filled, etc.
- Any special committee establishment within the corporation.
- What the composition of the Officers will be (numbers: min/max), are and
what they are required to do.
- Rules for meetings: annual, regular, or special meetings need to be discussed
in the bylaws.
- Any conflicts of interest clauses so that the corporation is full protected
from IRS penalties.
- Establishment of rules for amending bylaws.
- And any special clauses that protect the corporate directors, officers
The corporate Bylaws are essentially a more detailed Articles of Incorporation
and just one more layer of protection and establishment of operational
guidelines for a corporation. Without these foundational rules and respective
protective clauses, a corporation structure will turn into chaos.
Articles of Organization
The Articles of Organization is a document similar to the articles of incorporation,
outlining the initial statements required to form a limited liability
company at the state level. It is a necessary document for setting up
an LLC in many US states. Some states refer to articles of organization
as a certificate of organization.
The Articles of Organization must include the following:
- Your new LLC's name and address.
- The nature of the LLC's business.
- Name and address of your LLC's registered agent.
- Name(s) of manager(s) and members of the LLC, if known at the time of filing.
Make sure your Articles of Organization are written in proper legal language.
You can come into trouble with improperly worded Articles of Organization.
For instance; making your business nature too specific may limit your
business operational prospects. If you are unsure how to do this, contact
a licensed attorney to help you with the draft.
An operating agreement is an agreement for a limited liability company
("LLC"). This agreement delineates LLC member's financial
and managerial rights and duties. This agreement can also included succession
clauses in the event one member dies or wants to give up their ownership
in the LLC.
The operating agreement, although not required, is extremely important
to have. This agreement is an internal agreement between the LLC's
members. The reason for this agreement is to ensure that the LLC and its
members are protected in the event of a member leaving the LLC, bankruptcy,
death or other major business occurrence that has the influence to change
the structure of the LLC. Without specific directions for certain events
(which should be outlined in an operating agreement), the LLC could be
pushed to change in a way not intended by the members or even forced into
For instance, if a member of an LLC dies, the LLC must dissolve in most
states. A way around this is to have an operating agreement stating that
the LLC is against dissolution in the event of a member death, which is
detailed in successive clauses.
Further, limited liability companies are very flexible in nature and the
operating agreement defines each member or manager's rights, powers
and entitlements. If there is a member altercation or miscommunication,
the operating agreement can be the cure. It's always best to set out
rights, powers, and entitlements when every member is feeling positive
about the other members. That way, in the event of a fall out –
these (calmly constructed) guidelines are the ones your company wants
to use to resolve any disputes.
Other Business Formalities
Depending on your business entity type, there may be additional filings
and reports you will need to submit to your incorporating state and/or
the IRS yearly. Make sure you keep a record of these formalities and comply
with them. Each state is different so make sure you look up your specific
state's requirements for business entity maintenance. Failure to do
so may lead to penalties and potentially the forced dissolution of your
business entity in extreme cases.
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But don't delude yourself and accept reality — for every 60
minutes you spend making money, spend 60 seconds thinking about how to