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HOW TO INCORPORATE

8 Things To Do Before You Form Your Company
By Dan F. Schramm

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Incorporation is a fast, affordable process. It benefits the business owner by protecting personal and family assets from the risks and debts of the business. Here are eight guidelines to help make forming your corporation painless. These guideliness apply to LLC formation as well, but our primary interest is in forming a corporation.

Select Your Company Name
Your company name can identify the type of products/services your business provides, or it can simply be the name of the founder, or a combination thereof. The main requirements for a company name are that no other entity in the same state may have the same or similar name. A name can not be deceptively similar to another corporation in the state. Secondly, every state requires that the name must include an ending such as company, incorporated, or corporation. Some states allow "limited." Abbreviations are also acceptable. Some words such as "bank" or "insurance" can only be used with approval from the appropriate state agency.

Picking the name is perhaps the most important step in forming your corporation. Names can be generic or specific. The more specific the name is, the easier it will be to protect. In my view the name should tell people something about your business. Using English words is the simpliest approach, but if the nature of your business will work with a coined name, that may be the way to go. There are many examples of coined words, such as "koin" for coin, "ez" for easy. Zerox, Exon and similar corporate names are coined words. These are not real words, they were invented to use as a company name. Inventing a word offers benefits in trademark protection, but without major advertising support, it is worthless. Word invention is not for small businesses.

When you have decided on one or more names, the next step is to do some research. If your business will only operate in one state, a search of state registered trademarks may be adequate. Simply because another company is not incorporated with the same name does not mean that someone does not have a state trademark on that name. If another company in another state has the same or very similar name and has a federal trademark registration and decides to operate in your state, you may end up in U.S. District Court and face losing your name.

I strongly recommend doing state and federal trademark searches in addition to a name availability check with the secretary of state. Using a name that is free and clear is the best approach in the long term.

Select Your Business Structure

A general corporation, also known as a "C" corporation, is the most common corporate structure. It may have an unlimited number of stockholders. (The number of people you can sell stock to is limited by state law and SEC regulations.) A "close" corporation is appropriate only for the individual starting a company alone or with a small number of people. A "Close" corporation is a Subchapter S corporation in effective but with further restrictions. A "close" corporation is a different type of corporation under a specific statute of Florida law. It is best when there are stockholder qualificatins or the stock is very restricted. "Close" corporations can be operated without a board of directors and more like a partnership. A "Close" corporation is often more like an LLC, but law concerning corporations and LLC's are different so it is not really the same thing. More detail is provided on the Stock Information page. If you want to do a "Close" corporation we seriously suggest you hire a qualified business attorney.

Subchapter S is not a different form of incorporation; it is an election made by filing form 2553 with the Internal Revenue Service. States may also have limitations on a S corporation. Florida S Corporations can have no more than 75 stockholders, can have no U.S. non-resident stockholders and it is not allowed to own or manage more than 80 percent of another corporation's shares.

Another restriction is that the "S" corporation can only have one class of stock. At first glance, this may not seem important, but it can be. For instance, if you are raising money for a corporation and want to maintain control of it without investing the major share of the capital, the only way to do it is to have common and preferred shares. Only common shares usually carry voting rights. Thus, the founder could have 52 percent or 55 percent of the common stock, but have a far smaller percentage of the overall ownership of the total outstanding shares. The other shareholders would have many more shares of preferred stock than common stock. There is also the possibility that you might want to raise money in the future without diluting the Class A common shares by issuing a different class of common stock to raise money. You can always change from a "S" corporation to a "C" corporation. Consider all aspects before electing to be a "S" corporation.

The single big advantage of a Subchapter S corporation is that it is not taxed separately from its stockholders. Income is taxed only to the individuals who receive it. A "C" corporation pays income taxes on its income. When that income is distributed as dividends to its stockholders, the stockholders than pay personal income tax on that income.

There is no difference in the incorporation between a "S" and "C" corporation. The Secretary of State could care less. This is an election the corporation would make after it is formed by filing Form 2553 with the Internal Revenue Service (IRS).

An LLC is not a corporation, but it offers many of the same advantages, combining the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership.

Even if you do not want to operate an actual business, incorporation is something to consider for other purposes. There is even a seminar sold in television commercials aimed at the benefits of incorporation called the "Ray Reynolds Plan for Success". (I have no personal experience with this system and can not recommend it.) A corporation is a legal entity, it is a person in the eyes of the law. Thus, a corporation, for instance, can build its own line of credit separate from your own. A corporation can do the same legal acts an individual can do. One example, which California does not like, are people there who form corporations in Montana and use the corporation there to purchase their motor home/RV, thus escaping the high taxes on these vehicles in California. Personally I have always thought it was a good idea to own vehicles in the name of a corporation.

Select Your State

Many business owners incorporate or form an LLC in the state where they are planning to operate because it is often least complicated and most cost effective.

Delaware still holds appeal for new companies because of its relatively low incorporation fees, low annual franchise taxes, and lack of state income tax for corporations operating outside of Delaware. Delaware is popular for big companies because its state law and court decisions favor stockholders. Nevada has become increasingly business-friendly with its advantageous tax advantages and is known for its tilt towards management.

Florida offers a number of advantages. Living in Florida also offers advantages as there is no state personal income tax and your home and car are protected against creditors. If you are located in Florida it makes sense to incorporate here.

If you already have a corporation in another state, you can register in Florida (which is similar to incorporation) to legally conduct business here. You protect your corporate name and have all the powers of any other corporation in Florida.

Select Your Management Team

Naming initial directors for your corporation is straightforward. Directors are typically the key players or owners in the business. In most states, only one director is required and you may simply name yourself. In an LLC, managers or members are selected.

If your corporation will have a number of stockholders, then the stockholders will elect the board of directors. The board of directors will then elect the chairman and the officers of the corporation.

Even if you are the only director rules of corporate governance must still be followed. Proper bylaws, corporate minutes and other recordkeeping is required. Failure to properly operate the corporation can result in the corporate veil being pierced in a civil action and you may be found personally liable for the corporation's debts. Failure to file annual reports and other requirements of the state can result in the corporation being administratively dissolved. Should you continue to operate the business after that, you may be held personally liable for debts and other obligations.

Select Your Number of Stock Shares and Par Value

Stock represents ownership in a corporation. Par value is the minimum selling price for each share of stock. Many states allow you to elect a $0 par value, to give you the most flexibility. LLC's do not issue stock, so LLC ownership is like a partnership.

A number of states, including Florida, do not require that par value be given. Some states have different incorporation fees based on the number or value of shares to be issued. This does not apply to Florida.

You are permitted to sell stock to individuals and others. There are restrictions. You are not allowed to advertise the sale of shares. Basicly you must have a pre-existing relationship with the person. A significant exemption to this rule are institutional and professional investors. See SEC and state investment regulations for the definition of these types of investors.

There are two approaches to selling stock. One, you can create a business plan and include a stock subscription. People interested in investing will sign the stock subscription which is a binding contract. There are limitations and requirements. The major limitation is that the corporation will not be formed until subscriptions total the investment the business plan calls for.

The second approach is to incorporate first and then sell stock. This approach lets you get off the ground right away, so to speak, though the company will probably be dependent upon your own money until you sell stock to others. This approach creates a greater risk for your investors as they do not know if you will really have enough money to operate the business successfully.

Choose a Corporate Kit

A Corporate Kit will help you organize and save your important company documents. They often include a corporate seal, stock certificates, stock transfer ledger, and sample forms for bylaws and minutes. Blue Planet Offices offers a complete kit or you can purchase the individual items that you like.

Designate a Registered Agent

The Registered Agent serves a critical purpose and is an important part of protecting your corporate status. If you live in the state where you are incorporating, you or an associate will likely be the registered agent. If you are registering as a foreign corporation or are incorporating in a state other than your home state, you must have a registered agent. Select an individual or a corporation for this role. Look for a company that is responsive and easy to contact, with reasonable pricing.

Blue Planet Offices, Inc. offers registered agent service and is the only commercial registered agent in Key West or the Florida Keys.

Not to Worry!

Your decisions about company formation may be changed after your company is formed, simply by filing an amendment. Broad flexibility is available to you as your company grows and its needs change. Still, you should be careful in filing as an amendment can cost as much as the original incorporation.

FULL LEGAL DISCLAIMER

The information contained in this web site is provided to you "AS IS", does not constitute legal advice, is governed by our Terms and Conditions Of Use, and we are not acting as your attorney. We make no claims, promises or guarantees about the accuracy, completeness, or adequacy of the information contained in or linked to this web site and its associated sites.

The law changes very rapidly and, accordingly, we do not guarantee that any information on this web site or our affiliated web sites are accurate and up to date. Additionally, the law differs from jurisdiction to jurisdiction, and is subject to interpretation of courts located in each county. Legal advice must be tailored to the specific circumstances of each case and the tools and information provided to you may not be an appropriate fit in your case. Nothing that you read or is provided on this web site should be used as a substitute for the advice of competent legal counsel.

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Key West, FL 33040-4077

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