Start Your Own Business (22 page)

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Authors: Inc The Staff of Entrepreneur Media

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To start the process of incorporating, contact the secretary of state or the state office that is responsible for registering corporations in your state. Ask for instructions, forms and fee schedules on incorporating.
It is possible to file for incorporation without the help of an attorney by using books and software to guide you. Your expense will be the cost of these resources, the filing fees and other costs associated with incorporating in your state.
If you do it yourself, you will save the expense of using a lawyer, which can cost from $500 to $5,000 if you choose a firm that specializes in startup businesses. The disadvantage is that the process may take you some time to accomplish. There is also a chance you could miss some small but important detail in your state’s law.
One of the first steps in the incorporation process is to prepare a certificate or articles of incorporation. Some states provide a printed form for this, which either you or your attorney can complete. The information requested includes the proposed name of the corporation, the purpose of the corporation, the names and addresses of those incorporating, and the location of the principal office of the corporation. The corporation will also need a set of bylaws that describe in greater detail than the articles how the corporation will run, including the responsibilities of the company’s shareholders, directors and officers; when stockholder meetings will be held; and other details important to running the company. Once your articles of incorporation are accepted, the secretary of state’s office will send you a certificate of incorporation.
 
TIP
 
Small Business Resource
magazine, an annual publication of the SBA, offers a plethora of tips and advice for starting a business. Besides a national edition, the magazine has state editions that feature local resources. Access the edition of your choice for free at
smallbusiness3.com
.
Rules of the Road
 
Once you are incorporated, be sure to follow the rules of incorporation. If you fail to do so, a court can pierce the corporate veil and hold you and the other business owners personally liable for the business’s debts.
It is important to follow all the rules required by state law. You should keep accurate financial records for the corporation, showing a separation between the corporation’s income and expenses and those of the owners.
The corporation should also issue stock, file annual reports and hold yearly meetings to elect company officers and directors, even if they’re the same people as the shareholders. Be sure to keep minutes of shareholders’ and directors’ meetings. On all references to your business, make certain to identify it as a corporation, using Inc. or Corp., whichever your state requires. You also want to make sure that whomever you will be dealing with, such as your banker or clients, knows that you are an officer of a corporation. (For more corporate guidelines, see “Corporate Checklist” on page 131.)
IN OTHER WORDS
 
I
f you are starting a sole proprietorship or a partnership, you have the option of choosing a business name, or dba (“doing business as”), for your business. This is known as a fictitious business name. If you want to operate your business under a name other than your own (for instance, Carol Axelrod doing business as “Darling Donut Shoppe”), you may be required by the county, city or state to register your fictitious name.
 
 
Procedures for doing this vary among states. In many states, all you have to do is go to the county offices and pay a registration fee to the county clerk. In other states, you also have to place a fictitious name ad in a local newspaper for a certain length of time. The cost of filing a fictitious name notice ranges from $25 to $100. Your local bank may require a fictitious name certificate to open a business account for you; if so, a bank officer can tell you where to go to register.
 
In most states, corporations don’t have to file fictitious business names unless the owner(s) do business under a name other than their own. In effect, incorporation documents are to corporate businesses what fictitious name filings are to sole proprietorships and partnerships.
Limited Liability Company
 
Limited liability companies, often referred to as “Lacs,” have been around since 1977, but their popularity among entrepreneurs is a relatively recent phenomenon. An LLC is a hybrid entity, bringing together some of the best features of partnerships and corporations.
“Nobody can be a success
if they don’t love
their work.”
—DAVID SARNOFF,
CHAIRMAN OF RCA
 
 
LLCs were created to provide business owners with the liability protection that corporations enjoy without the double taxation. Earnings and losses pass through to the owners and are included on their personal tax returns.
Sound similar to an S corporation? It is, except that an LLC offers business owners even more attractions than an S corporation. For example, there is no limitation on the number of shareholders an LLC can have, unlike an S corporation, which has a limit of 100 shareholders. In addition, any member or owner of the LLC is allowed a full participatory role in the business’s operation; in a limited partnership, on the other hand, partners are not permitted any say in the operation.
 
SAVE
 
If limited liability is not a concern for your business, you could begin as a sole proprietorship or a partnership so “passed through” losses in the early years of the company can be used to offset your other income. After the business becomes profitable, you may want to consider another type of legal structure.
To set up an LLC, you must file articles of organization with the secretary of state in the state where you intend to do business. Some states also require you to file an operating agreement, which is similar to a partnership agreement. Like partnerships, LLCs do not have perpetual life. Some state statutes stipulate that the company must dissolve after 30 years. Technically, the company dissolves when a member dies, quits or retires.
If you plan to operate in several states, you must determine how a state will treat an LLC formed in another state. If you decide on an LLC structure, be sure to use the services of an experienced accountant who is familiar with the various rules and regulations of LLCs.
Another recent development is the limited liability partnership (LLP). With an LLP, the general partners have limited liability. For example, the partners are liable for their own malpractice and not that of their partners. This legal form works well for those involved in a professional practice, such as physicians.
The Nonprofit Option
 
What about organizing your venture as a nonprofit corporation? Unlike a for-profit business, a nonprofit may be eligible for certain benefits, such as sales, property and income tax exemptions at the state level. The IRS points out that while most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level does not automatically grant you an exemption from federal income tax.
LAYING THE FOUNDATION
 
W
hen making a decision about which business structure to use, answering the following questions should help you narrow down which entity is right for you:
• How many owners will your company have, and what will their roles be?
• Are you concerned about the tax consequences of your business structure?
• Do you want to consider having employees become owners in the company?
• Can you deal with the added costs that come with selecting a complicated business structure?
• How much paperwork are you prepared to deal with?
• Do you want to make all the decisions in the company?
• Are you planning to go public?
• Do you want to protect your personal resources from debts or other claims against your company?
• Are family succession issues a concern?
 
Another major difference between a profit and nonprofit business deals with the treatment of the profits. With a for-profit business, the owners and shareholders generally receive the profits. With a nonprofit, any money that is left after the organization has paid its bills is put back into the organization. Some types of nonprofits can receive contributions that are tax deductible to the individual who contributes to the organization. Keep in mind that nonprofits are organized to provide some benefit to the public.
Nonprofits are incorporated under the laws of the state in which they are established. To receive federal tax-exempt status, the organization must apply with the IRS. First, you must have an Employer Identification Number (EIN) and then apply for recognition of exemption by filing Form 1023 (
Application for Recognition of Exemption Under Section 501 (c)(3) of the Internal Revenue Code
) or Form 1024 (
Application for Recognition of Exemption under Section 501(a)
) with the necessary filing fee. Both forms are available online at
irs.gov
. (For information on how to apply for an EIN, see Chapter 41.)
 
e-FYI
 
To help sort through the business structure maze, you can order free IRS publications—
Partnerships
(Publication 541),
Corporations
(Publication 542), and
Tax Issues for Limited Liability Companies
(Publication 3402)—by downloading them from the IRS website at
irs.gov
.
The IRS identifies the different types of nonprofit organizations by the tax code by which they qualify for exempt status. One of the most common forms is 501(c)(3), which is set up to do charitable, educational, scientific, religious and literary work. This includes a wide range of organizations, from continuing education centers to outpatient clinics and hospitals.

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