Mechanically, the question “how do I incorporate a business?” differs a little from the question, “how do I set up a corporation?” Accordingly, in this article, I want to talk a bit about the process of incorporating a new or existing business. You can think about all this as a “big picture” description.
Incorporating a New Business
Incorporating a new business—one that hasn’t operated before—is actually the easiest sort of new business incorporation. In this case, you walk through the following steps:
1. Create the corporation by filing appropriate paperwork with the state.
The first step, perhaps predictably, is setting up the corporation. In almost all states, you do this simply by filing some paperwork with your state’s secretary of state. (You can get help with this paperwork by purchasing one of the Do-it-Yourself Incorporation Kits listed to the left of this page.)
2. Issue stock to shareholder(s) in exchange for cash and possibly other assets.
The second step is to fund the new corporation by issuing stock to shareholders (or maybe only a single shareholder) in exchange for money. In other words, you might, after the new corporation is formed, give the corporation a $1,000 check in return for 100 shares of stock. You could be the only shareholder exchanging money for stock in this manner. Or you might be one of several shareholders making this exchange.
3. Agree on the rules of governance and then setup a board and elect officers.
At some point early on—and probably as part of an initial organizational meeting—the corporation’s new shareholders will need to agree on the corporate by-laws that will control the way the corporation works. Two of the initial “control and governance” tasks will be setting up a board of directors to oversee the shareholders’ interests and then having the board of directors elect officers to run the business on a day-to-day basis. Note that mechanically, the procedures for having the shareholders elect board members and having board members elect officers will all be described in painstaking detail in the by-laws.
4. Get any business licenses required and start operation.
After the officers are elected, those officers can get a business license and, then, begin normal operation: buying inventory, selling stuff, hiring employees, and so on.
Incorporating an Existing Business
Incorporating an existing business—a business that’s already been operating—requires a bit more fiddling and presents a minor tax risk. With an existing business, the incorporation process requires following steps:
1. Create the corporation by filing appropriate paperwork with the state.
As with a new corporation for a brand new business, the first step for an existing business is simply setting up the corporation. As noted earlier, one does this by filing some simple paperwork with secretary of state in the state where the corporation is located.
2. Issue stock to shareholder(s) in exchange for the business assets and liabilities.
The next step is to fund the new corporation by issuing stock to shareholders (or maybe only the single shareholder) in exchange for the existing business’s assets and liabilities. In other words, typically with an existing business, the business’s existing owner or owners will contribute the assets and liabilities of the existing business to the corporation in exchange for the stock in the new corporation. For example, a business already in operation might contribute its working capital (including cash, inventory and accounts receivable), its furniture and fixtures, and its liabilities (which might include accounts payable and for sake of illustration a bank loan.) The trick here, by the way, is getting all of the assets and liabilities either re-titled into the new corporation’s name or transferred to the new corporation.
Caution: When you exchange assets other than cash for stock in a corporation—even a corporation you’re setting up for an existing business—you need to be careful that the exchange doesn’t trigger income taxes. To avoid income taxes, you generally need to make sure that the business’s existing owners control at least 80% of the stock in the new corporation, that the liabilities transferred to the corporation don’t exceed the depreciated basis of the total assets transferred, and that no personal liabilities are inadvertently transferred as part of the exchange. If you have questions about how these rules work in a specific situation, you really should confer with a local tax accountant.
3. Agree on the rules of governance, then set up a board and elect officers.
As with any corporation, a new corporation for an existing business requires an initial organizational meeting where the new shareholders must agree on the corporate by-laws to specify how the new corporation operates. Two additional “control and governance” tasks, of course, will be setting up a board of directors to oversee the shareholders’ interests and then having the board of directors elect officers to run the business on a day-to-day basis.
4. Get business licenses required and re-start operations.
After the officers are elected, those officers can get a business license or perhaps transfer the old business license and, then, restart operations.