Understanding the Articles of Incorporation
If you decide to run your business as a corporation, filing your articles of incorporation makes it official. Also known as a certificate of incorporation, this is the paperwork you’ll need to fill out before the first sale.
Specifics vary by state, but articles of incorporation are typically a short form that includes information about your business, including the business purpose and address, said Chris Jackson, founder of Los Angeles-based financial planning firm Lionshare Partners.
You could opt for a different type of business entity — sole proprietorships, for example, require zero paperwork — but there are several advantages to corporations, particularly for medium- or high-risk businesses. Corporations offer the strongest protections for their owners and make it easier for them to raise capital. If you plan to eventually sell your company or go public, a corporation is probably the best business structure. We’ll help you understand how to file and get your corporation off to the right start.
What are the articles of incorporation?
Articles of incorporation are one way for states to know what business is being conducted within their borders and by whom. Filing your articles of incorporation can be fairly simple — though there’s usually a cost involved — and generally requires the following information:
- Name of the corporation — Although this may seem like a straightforward step, you’ll want to make sure your corporation name doesn’t already exist in your state or risk your application being rejected. This should be fairly easy to research on your state’s Secretary of State website.
- Business address — See more about this below, when we discuss appointing a registered agent.
- Business purpose — The required specificity of this section varies by state, so unless your state requires great detail, some advisers recommend keeping this section extremely broad — e.g. “the purpose of the corporation is to engage in any lawful activity for which corporations may be incorporated in this state.”
- Registered agent — Again, see more about this below.
- Number of shares the corporation will issue — Many states may have a minimum filing fee that allows you to issue a certain number of shares of stock. Exceed that number and the filing fee goes up — you can always authorize more stock later, if necessary. Your state may also require you to disclose the specific number of shareholders your corporation is authorized to have.
Name a registered agent
The information above should be readily available, though you would have to designate a registered agent to represent your corporation. A registered agent is someone who would accept service of process if the corporation gets sued. The registered agent must live in the state where your business is incorporated, and may or may not be directly affiliated with the company.
You can act as your company’s registered agent, or appoint someone else to protect your anonymity, Jackson said. You can also hire a third party to act as a registered agent, such as LegalZoom, which offers registered agent services for a yearly price.
Articles of incorporation are public documents, so you may want to avoid putting your name or personal address on any forms when possible if you would like to keep your identity as the owner private, Jackson added.
Your state’s Secretary of State typically provides the articles of incorporation form for you fill out and submit — usually via an online downloadable form — though you may be able to create your own document with the necessary information.
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How to file your articles of incorporation
Once your articles of incorporation are prepared, you would submit the final document to your Secretary of State; note that it is possible that some states may route applications through a different office, such as the Arizona Corporation Commission in Arizona. All incorporators may need to sign the form, or an attorney could sign in place of an incorporator.
There are several ways to file your articles of incorporation: in person, online, by email, by mail or by fax. Your state office should specify which options are available. Filing online would likely be the quickest way to become incorporated.
You also must pay a fee when filing, which would likely be around $100. In California and Georgia it costs $100 to file articles of incorporation, while incorporators in North Carolina and New York face a filing fee of $125. You may be charged an additional fee when filing an annual report, if your state requires one.
When paying filing fees, make sure the money is coming out of your business bank account, Jackson said. The payments should be tied to the corporation.
It’s not necessary to add the extra expense of hiring an attorney to file your articles of incorporation, but it may be a good idea to have a legal professional review the document before you submit it, Jackson said. You can make changes later, but it’s best to avoid early mistakes. Having a lawyer on hand could be beneficial in the future, too, as you may need help with ongoing legal requirements, he said.
“When an issue occurs, it’s a little too late,” Jackson said. “If you want to save some money early on, do so. But the management of your corporation needs to be something you discuss outside of yourself and another member of your company.”
The different types of corporations
There are a few types of corporations to choose from when incorporating your business. The structure you pick would affect the taxes you owe and the number of shareholders you can have.
An S corporation, or S-corp, is treated as a pass-through entity in the eyes of the IRS. Instead of being taxed at the federal corporate tax rate, income passes through to shareholders and is taxed at the individual income tax rate. Under the new tax law, pass-through entities are also able to deduct up to 20 percent of qualified business income.
S-corps operate independently from shareholders, meaning the company can carry on if one shareholder leaves or sells their shares. However, S-corps are limited to 100 shareholders who must be U.S. citizens. All owners have limited liability and would not be responsible for the company’s debts.
A C corporation, or C-corp, is also independent of its owners and can have an unlimited number of shareholders. Owners have limited liability and do not have to personally pay the company’s debts.
C-corps are subject to double taxation, as the business pays corporate income tax and shareholders pay tax on dividends on their personal returns. The new tax law caps the corporate tax rate at 21%.
A benefit corporation, or a B-corp, is a for-profit corporation that is also mission-driven. B-corps are more transparent than traditional C-corps, but both entities must pay corporate taxes. B-corps may also be required to submit annual benefit reports that show community contributions. Shareholders are responsible for holding the company accountable to contribute to the public good and remain profitable.
Choose wisely. You should choose the corporate entity that is best for your business model and growth plans, Jackson said. General tax and shareholder benefits may look good on paper, but you should take the time to determine which structure would most benefit your specific business.
“There are some tax benefits for certain entities that make sense based on the industry you’re in,” Jackson said. “So don’t fall for rule of thumb.”
Next steps after filing
After filing your articles of incorporation, you’ll receive a certificate officially recognizing your business as a corporation, according to Jackson — but you’ll still have work to do.
There are many regulations that corporations must keep up with and ongoing filing requirements based on your location. You may be required to create or file the following documents.
Statement of information/Annual report
After filing your articles of incorporation, you must file a statement of information, or annual report, every one or two years, depending on your type of business. The statement of information includes your corporation name, address, type of business, registered agent and the names of several officers. In California, for example, you would be required to name your chief executive officer, chief financial officer and secretary. There is usually a filing fee, but your state may provide the form for you to fill out.
Your bylaws are the governing documents for your corporation. Bylaws are not filed with any government agency and are for internal use only, but they are critical to keeping the operation running smoothly. Bylaws serve as the formal guidelines for how you will handle disputes within the company, as well as losses, profits, ownership percentages and even dissolution, if the business were to close. An attorney could draft bylaws for your corporation, or you could search for free templates online.
Certificate of good standing
A certificate of good standing verifies your existence and status as a corporation in your state. In Wyoming, business owners can generate a certificate of good standing on the Secretary of State website at no cost.
When owners, members of management, partners or shareholders have meetings, recorded minutes are filed afterward to document what occurred. Some states don’t regulate meetings for corporations, but minutes must be recorded anyway. Minutes can be used to review meeting events like adding or removing a director, or voting for or against certain actions. A person within the organization is typically tasked with keeping track of physical and digital copies of meeting minutes.
As a corporation, the IRS may require you to pay estimated or annual income tax, employment tax and excise tax. Corporations have several tax due dates throughout the year as well. Corporations that have assets of $10 million or more typically file at least 250 returns annually. More than 40 states also levy a corporate income tax, with rates ranging from 3% in North Carolina to 12% in Iowa.
The validity of your corporation relies on your diligence in filing the necessary information. Many law firms offer corporate maintenance programs to help business owners comply with annual and seasonal requirements and obligations. It could be beneficial to have a lawyer make sure you don’t miss any details. If your corporation gets sued, an attorney could argue that any missing information invalidates your entire operation, Jackson said.
“You can make an argument in court that this isn’t a real business,” he said. “That’s not what you want.”