Business Incorporation: What Legal Documents and Forms for incorporation?.

We all know what a Corporation is because most of us work for one but not many understand the implications and legal ties and the processes involved in forming this type of business entity but there are great opportunities that can create a viable business after proving the worth of a commercial idea. A U.S. Corporation is an independent legal entity set-apart from it's owners, who are the shareholders, that is created through legal instruments created by each states legislature. The Corporation takes on a life of it's own analogous to being a person and is treated in the same way having it's own unique identity that is regulated and checked by law makers and enforcers, for example the recent corporate cases of misconduct, namely: Enron and Worldcom. The governance of the enterprise is through the laws of the state where it was incorporated in conjunction with the laws of the States where it has active business activities. Therefore the profits, losses, debts and liabilities are the property and encumbrance of the corporation and not the stock-holders or management. Whose liability is limited by their investment excepting cases of stock fraud and insider trading activities; although the successes, failures and risk analysis of the business is reflected in the share value and associated dividends. Therefore the ongoing track record of the management is a key issue for stock-holders and investment institutions. From this discussion it may be realised that this form of business entity is far more complex to form and to operate and should be avoided if a current business has stagnated growth or a narrow market with limited potential for growth and innovation.

For a corporation to be formed approval is sought from the Secretary of State in the U.S State where the business is being formed by submitting: Certificate of Incorporation, Articles of Organisation & Incorporation or a charter. Once the Articles of Incorporation have been approved then the business entity legally comes into existence and is allowed to start trading. The immediate next step after being approved is to adopt state operational rules and bylaws which outline mandatory structures of the operation and corporate management.

Domestic & Foreign Corporations.

In the state where the business has been formed the company is called a domestic corporation and signals the laws that it has been incorporated under. A foreign entity is a corporation that has been formed in another state and has to qualify and be approved to carry-out business in all other U.S. States. This means for example that a corporation formed in the state of Alabama is a domestic corporation in Alabama but is regarded as a foreign Corporation in all other U.S. States and will need legal permission to trade in those states. This may not present a problem if the corporation is a firm of Attorneys who may only wish to operate in a single state but it is more likely to present an additional expense for a corporation involved in manufacturing and distribution.

Close or Closed Corporations

The name for this type of operation is derived from the circumstance of where the shares are either held by an individual or is tightly held by a group of people such as family members. Frequently this type of company is relatively small and has most often evolved from being a partnership or sole proprietorship and has migrated to this type of business entity to benefit from having a limited liability, better pension rights and tax regime.

Professional Association, P.A., or Professional Corporations, P.C.

With this business model it can be organised to represent an operation that is a profession; these are known as professional corporations that can can be set-up by professionally qualified people who may practice as: Civil Engineers, Chartered Accountant, Medial Doctors & Consultants, Lawyers & Attorneys. These are examples of the types of professionally qualified people who can start a professional corporation whose corporation company name and identity will be suffixed by the designation of either P.A.; professional Association or P.C.; professional corporation.

Non-Profit Making Corporations

This type of business entity operates more like a charitable trust for non-profit-making groups: religious, charities, hospital, universities, foundations; groups of people who operate charitable and non-profit-making activities. These corporations do not have shareholders to influence the governance activities of the board members they have directors or trustees who control every aspect of the corporation within the constraints of state legislation.

“S” and “C” Corporations

Generally for commercial business there are two distinct type of corporation, namely the “S” and the “C” type; the letters are prefixes that refer to the sub-chapter of the U.S. Tax Code that explains the tax consequences for either type of organisation and the methodology of operation.

In a sub-chapter “C”- Corporation the shareholder directors who own the business expressed through their shareholding essentially pay double taxes on the business income; the corporation tax liabilities have to be paid before the income of the owner directors can receive their income Therefore the director employees are paid from money that has already been taxed and it is taxed a second time through personal income tax. Thus the term and disadvantage of incorporation for a small business; Corporation Double Taxation. The “C”- Corporation has many inherent advantages for a business idea that has the potential and proven ability to be very popular, wanted and needed by the masses and/or institutional consumers, for example: Government, Aerospace, Defence, Military, OEM's etc. If a business owner wants to retain the taxation advantages of either the sole proprietor or partnership business models with the limited liability advantages of a corporation then the Sub-chapter “S”- Corporation will be the legal business entity of informed choice.

The pathway to form an "S"-Corporation is to register as a "C"-Corporation first and then to migrate the terms through the Articles of Organisation and Association to the preferred business model; that is an excellent interim solution having many of the key attributes of a corporation suitable for a small developing business.

This type of model is especially appropriate for organisations who expect investment losses during the start-up phases of development.

Appropriate for avoidance of the type ”C:”- Corporation double taxation regime. The directors of the “S” type company are taxed as a partnership.

Personal financial protection is secured through the limited liability nature of a corporation.

For business owners who need to over-come the lack of business continuity that is an inherent disadvantage of the sole proprietorship and partnership models. This creates: continuity, saleability and enterprise investment opportunities that are achievable through the “S”- Corporation business framework and are absent or at least difficult to achieve in as a sole trader or partner.

This framework is used by those who do not intend to become a wholly public company, this is a limitation for seeking institutional or corporate investors for raising capital.

This is attractive for companies who expect to be eligible for: Public Minimum Taxation and for corporate officers who reside in a state that does not have Personal State Income Tax. For businesses that have an income of approximately $300,000 p.a. or less and owner/ shareholder who have a low income or whose income level meets the national minimum.

The “S”- Corporation is most suited to people who are at an interim stage of corporate development or those who intend to not develop much beyond a partnership enterprise but who wish to enjoy the security offered through transforming its business into a type of corporation that has similar benefits of being self-employed.

The “S”-Corporation is formed after forming the “C”-Corporation first, the transition is made by making a tax election by filing a tax form for the IRS,namely:IRS Form 2553. This form must be filed by 15^th March for it to be effective in the tax year of formation or within 75 days of forming the “C”-Corporation. Each year this entity must file IRS Form 1120 to report its annual accounts by the 31^st December.

Shareholders Responsibilities & Duties: Chosen to be treated as business partners for personal tax purposes, they can elect directors and officers of the business usually at the A.G.M. And they have voting powers on specific major plans and corporate relative issues. Shareholders enjoy the limited liability protection aspect of this business entity but their salary or income is treated as though they are employed as partners in a partnership. Shareholder numbers are limited to 75,seventy five, members which excludes other corporations or partnerships and people who are not either U.S. Citizens or U.S. Residents.

Directors Responsibilities & Duties: The company directors do not own the business and it is not mandatory for them to be shareholders or be involved on the day-to-day running of the business. They are however required through their responsibility as members of the board of directors for making the business decisions of the corporation which includes appointing its officers.

Officers Responsibilities & Duties: This position is attributed to: President, Vice President, Company Secretary and Corporate Treasurer; who are responsible for the day-to-day running of the enterprise. Officers are allowed to be shareholders and directors.

The member owners of simpler forms of business organisation such as the LLC or partnership have complete control and responsibility for decision making and how the business purports itself. When the simpler business structure migrates to becoming a corporation a proportion of control and authority is lost because the officer's of the corporate body are appointees of the board of directors and are directly answerable to the board for their decisions. And the board of directors are not unrestrained because they are answerable to the shareholders and their voting rights.

The formation, capitalisation and running costs of a corporation is far more complicated and costly than either a sole proprietorship or a partnership because of government regulation and the transparency that it demands through detailed professional record keeping of not only the finances but also the decisions made by the officers and board of directors. Meetings of the board and those held for shareholders are formal affairs that are documented unlike the partnership business model. This type of business organisation and structure is therefore unsuitable for a small business that has marginal profitability because of costs and associated legal burdens.

The corporation is obliged to pay tax on its profits before distributing profits to shareholders as dividends. Shareholders dividends are viewed by the government as personal income and is therefore taxed at the personal level. Therefore the profits are taxed twice and the shareholders payments cannot be shown or entered into the business accounts as a tax deductible expense.

To some extent the taxation regime of a corporation can be moderated by using a professionally designed Corporate Taxation Kit.

The most important factors that give the corporation an immense advantage comprise: (a) limited liability of the originators and (b) limited liability of the investor shareholders. The debt of the company is generally limited to the amount each officer or director has contributed to the business financially. And the shareholders liability is limited by the amount and value of the stock held. However there are a few exceptions,namely: Corporate Shell company; owned and run by a person who is essentially self-employed and a Corporate body that is under capitalised, under funded and under-insured. In these circumstances which are quite extreme and test the legal limits and boundaries of criminal and civil law the personal assets are at risk and can be targeted by creditors and the government. However under normal circumstances the corporations limited liability is a very important factor for a healthy vibrant business for attracting investors to organically growing the business.

In many U.S. States a corporation can have a perpetual existence making it an attractive proposition for future mergers and acquisitions to expand either its own operation or to be sold to another corporation to expand its own market penetration and presence. Making it easy to essentially change ownership and maintain continuity of form and purpose; unlike other business models, where it delivers a stable business image and trusted brand name.

Shareholders of corporate stock are free to buy and sell their holding and even bequeath it in a last will without consultation with other members unless there are restrictions placed through corporate decisions. This freedom gives investors liquidity and the ability to move investments very quickly at will.

In the event of the business being credible and profitable the strict rule and regulations actually provide a more professional and accountable framework with which to operate and for this reason can be viewed as a positive attribute.

The taxation regime can be either an advantage or a disadvantage depending on how the profits of the entity is spent or re-invested, here are some examples: Research & Development, Workforce Education; this refers to the Investors in People Program, Profit Sharing, Stock Option and Pension Schemes. Many of these features are exclusive to corporate participants.

In the links shown here are suppliers of Business Documents, agreements, contracts and every type of legal paperwork needed to run and maintain a healthy business.