So you’ve gone through the analysis and decided that a corporation (rather than a partnership, LLC or other entity) is the appropriate formal structure for you business.
You’ve filed your articles of incorporation with the state, paid the required filing fees and received confirmation that your articles have been approved and your business formed.
So now what? Well, forming the business is just the first step in ensuring that your new corporation is operating legitimately. So, there are a few major issues to consider starting now.
Appoint Directors and Officers
Every corporation needs directors and officers. These are the individuals authorized and appointed to conduct business on the corporation’s behalf for terms set either in your corporation’s bylaws or by statute (more on this later).
With terms like directors, officers, and shareholders floating around, things can get a bit confusing for the new business founder as to who plays what role. This is especially true when the corporation is small and there is some overlap between the roles with individuals wearing more than one hat.
But, understanding the differences in these individuals and what roles they play within a corporation is essential to ensuring the business runs smoothly and legitimately.
Shareholders make up the crux of the business ownership. As the owners of the corporation, they’re responsible for establishing basic corporate policy and direction, and for appointing directors (who are usually stockholders themselves). T ink about this is terms of any stock you may own in another company, like Apple or GE. As a shareholder, you actually have a voice in determining who is elected to run those companies (of course, in reality that power has little consequence since you own such a small portion). But, you do have a voice. In your corporation, there may only be a couple shareholders. Those individuals, in their capacity as shareholders get to decide who will run the day to day operations of the business.
In turn, directors are responsible for implementing the policies of the corporation as determined by the shareholders. They elect officers of the corporation. You’ve no doubt heard about the Board of Directors for larger companies. Yours has the exact same structure, just at a much smaller level (only for now, we hope!).
Finally, the corporation’s officers run the day-to-day operations of the company. For example, they’re responsible for ensuring that the company conducts its business properly and in accordance with the vision of the Board. Top-level officers, such as the President and CEO, have the power to execute contracts on behalf of the company, and must answer to the Board for any errors they make.
Draft Bylaws
All corporations are governed by a set of rules. These are called “bylaws”. Bylaws set forth the rules under which the corporation will operate. Bylaws are created and adopted by the Board of Directors and describe the roles and responsibilities of the corporation’s officers, directors and shareholders. They also set forth things like the meeting requirements, the matters that may require consent, the nature of the majority required, notice requirements, limitations on expenditures and a host of other matters.
Whether bylaws are legally required varies by jurisdiction. But, in the event your corporation does not have them, it will be governed by default rules contained in state statutes. Sometimes these mirror the rules you’d set for your corporation if you had the choice, but sometimes they don’t.
Obtain a Tax ID number
Your company must to apply for an Employer ID number (EIN) from the IRS in order to open a bank account and conduct business. To obtain an EIN, visit the IRS website and complete Form SS-4. You may also need to apply for state tax identification numbers, depending on where your corporation is formed and where it conducts business.
Open a Corporate Bank Account
Your corporation is a legal entity entirely separate from its shareholders, directors and officers. As a result, it needs its own bank account so that its finances can be maintained separately. To open an account, the bank will likely want to see a certified copy of your filed and approved Articles of Incorporation, director resolutions appointing the officers, a copy of your bylaws and your EIN number. It’s important to keep corporate and individual finances separate; otherwise, there is a significant risk that, in the event trouble arises down the road, a court will disregard your corporation as a separate entity when determining if you should be personally liable for actions of the corporation. That’s not a situation you want to find yourself in.
Register as a Foreign Corporation
If you’ve incorporated in another state, you’ll need to obtain official permission to transact business in any other states in which you transact business. In the era of ecommerce, this can sometimes be challenging, as products may be sold all over the country. To ensure that you’ve appropriately registered everywhere you may need to, it’s important to enlist a business attorney to make sure nothing is missed (and also that you’re not registering in states in which you may not be required to do so).
Keep Corporate Records
Setting the business up is only a small part of your responsibility. Going forward, you’ll want to keep good books and records for all corporate actions, meetings, elections, appointments and other significant corporate decisions. There’s no required format, so do what works for you. It can be a simple loose-leaf notebook, or electronic records kept safe on your computer or external hard drive. Whatever method you choose, it’s important to keep up with it. Like all other corporate formalities, failure to keep good records could lead to a disregard of the corporate for liability purposes.
Obtain licenses
Your work is not done simply after you’ve formed the corporation. Depending on your state, county and city, you may need to obtain additional business licenses. These may also vary depending on the corporation’s industry. Typically, state and local jurisdiction websites will contain guidance on licenses you may need. But, if you have any confusion, it can help hiring an attorney to make sure all the boxes get checked off.
Michael F. Brennan is an attorney at the Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached at michael.brennan@mfblegal.com with questions or comments, or check out his website atwww.thevirtualattorney.com.
The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.
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