Starting your own business is a big step, and the legal issues involved can be confusing. Thinking of a great business idea is hard enough, but it’s often more challenging to handle the countless legal documents and technicalities involved, especially if you want to become a corporation.
Here’s what you need to know about one of the first and most crucial steps of incorporating your business: filing your articles of incorporation.
Articles of incorporation, sometimes called a certification of formation or a charter, are a set of documents filed with a government body to legally document a corporation’s creation. These legal documents contain general information about the corporation, including the business name and business location.
Articles of incorporation are easy to confuse with bylaws, which lay out the rules and regulations governing a corporation and help establish the roles and duties of the company’s directors and officers. Bylaws work in conjunction with the articles of incorporation to form the business’s legal backbone.
Articles of incorporation are crucial because they establish a company within its home state, informing the state of essential aspects of the business. When filing, the business owner lets the state know the following:
Some states also request a copy of the company bylaws. The bylaws help keep a corporation running smoothly by outlining the rights and responsibilities of the shareholders and board of directors.
As a business owner, you can benefit from articles of incorporation in two main ways.
Articles of incorporation include the following information, with some variations by state:
Some companies may wish to amend their articles of incorporation after their business status is established. You can do this with a restatement, also known as restated articles of incorporation.
Articles of incorporation are intended for American corporations. A foreign corporation operating in the U.S. must instead file a certificate of registration. This legal document also varies in content and application process by state.
Articles of incorporation and articles of organization are similar filings, with one primary difference: Articles of incorporation are for companies looking to form a corporation, while articles of organization are for limited liability companies (LLCs) – an entirely different business classification under the Internal Revenue Code.
Establishing a business as an LLC provides legal and financial protections to the business owner. LLCs are usually preferred to corporations for companies that plan to have real estate holdings or other assets that change in value.
Like corporations, LLCs provide tax and liability benefits according to the stipulations of the Internal Revenue Code. Unlike corporations, LLCs cannot easily transfer holdings and aren’t a good choice for those looking to have outside investors.
Before filing either legal document, you should review your state’s rules and regulations. In some states, the terms “articles of incorporation” and “articles of organization” are used interchangeably.
If you establish an LLC, you need to keep unique LLC business tax considerations in mind. For example, LLC members are considered self-employed, so they’re responsible for the full amount of Social Security and Medicare taxes.
If you’re planning to register your company as an LLC, you’ll need articles of organization alongside an LLC operating agreement. The latter is a legally binding document that clearly defines the LLC’s structure, management, operations and finances. It states each LLC member’s roles, responsibilities, relationships and rights. It also lists each member’s ownership percentage and share of profits and losses.
LLC operating agreements can clear up confusion when allocating profits and losses or distributing ownership shares. Formal guidelines in your operating agreement can help you avoid the conflicts that often come with trying to sort out these matters verbally in real time.
You should include the following information in your company’s LLC operating agreement (your state may require additional information):
With an attorney’s help, you should build an LLC operating agreement with the following sections as your backbone.
Access to business loans: LLCs can build credit histories, so once you start your LLC, you can gradually qualify for small business loans to help your company grow.
Yes, an S corporation must file articles of incorporation. That said, an S corporation differs substantially from a C corporation, which more closely resembles the traditional idea of a corporation. Learn more below.
An S corporation combines a C corporation’s limited liability with the tax advantages you would get as a partnership or LLC. The primary tax advantage in question here is pass-through taxation – namely, S corporation income is taxed as personal income. That means your corporate profits and losses appear on your and your shareholders’ personal tax returns.
This arrangement was highly advantageous for the many decades during which federal personal income tax rates were lower than their corporate counterparts. However, the Tax Cuts and Jobs Act has lowered corporate tax rates enough to negate this benefit somewhat. That said, S corporation taxation structures still avoid the double taxation of paying taxes on corporate income and then again on personal income.
To start an S corporation, you’ll file articles of incorporation per the instructions in this guide. You’ll also file IRS Form 2553 to receive S corporation status at the federal level. That’s important because articles of incorporation are effective at the state level only, whereas business entity types exist at the federal level.
Unlike other corporation types, B corporations are not official tax or government structures. Instead, a B corporation is a certificate your business can earn while being an S corporation, an LLC or another type of business. It signifies that your company meets certain rigorous social standards that the nonprofit B Lab has set. These are the “highest standards of verified social and environmental performance, public transparency, and legal accountability to balance profit and purpose.”
You might want to obtain B corporation status since 85% of consumers have attempted to live more sustainable lifestyles in recent years. If your company obtains B corporation status, consumers would know that your products can empower their sustainable lifestyles.
To gain B corporation status, you must ensure that your state acknowledges this classification. If not, you can consider incorporating in a nearby state. You must then apply for a thorough audit through B Lab, which will survey factors such as how you treat your employees, environment and community. If you score high enough, you’ll become a B corporation, and you should expect random audits in the future.
After qualifying, you must share your scores on the B corporation website and legally commit to prioritizing your stakeholders. But before any of this, you’ll need to have incorporated your business.
Articles of incorporation separate the business owner from the business by creating a separate legal entity for the business. Incorporating reduces a business owner’s personal risk because the business becomes financially responsible for its debts and legally responsible in the case of lawsuits.
Any business type can file articles of incorporation. A new business may launch as a corporation, or a business structured as a sole proprietorship can later become a corporation. Smaller businesses typically become S corporations and pay taxes only on dividends, while large businesses often become C corporations, which pay corporate taxes and must have a board of directors to operate.
The first step is to structure the business as a corporation. The specific documents vary by state, but each includes several questions about the business and its owners. The forms are easily found online, but don’t be alarmed if they are called something other than articles of incorporation.
Despite variations by state, the forms all ask similar questions and use a fill-in-the-blank format. The crucial information includes the following:
Once you’ve filled out the proper documents, you can submit them by mail, in person at the secretary of state’s office or electronically on the secretary of state’s website, depending on your state.
The filing fee also varies by state, but it generally runs between $50 and $300. Other charges may apply at the time of the filing, again depending on the state.
After you’ve filled out all of the forms and paid all fees, the secretary of state’s office will review the forms to ensure the name isn’t already in use and that all other information meets the state’s requirements. If everything is correct, the state files the forms, making the business a legal corporation.
Every state is different, so here are links to each state’s form. You can fill them in online or print them out, complete them and send them to the secretary of state’s office.
Chad Brooks contributed to the writing and research in this article.