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
- Corporate Bylaws
- Articles of Organization
- Operational Agreement
- 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 (it's 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 and Nevada.
Some advantages to the Delaware Corporation are as follow:
- Delaware's business laws are some of the most flexible in the whole United States.
- The Court of Chancery focuses solely on business law and uses judges instead of juries.
- 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 your 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 protection 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:
- Name of the corporation.
- 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 fully protected from IRS penalties.
- Establishment of rules for amending bylaws.
- And any special clauses that protect the corporate directors, officers and shareholders.
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 include 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 early dissolution.
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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