The process of incorporating is applicable only to businesses that choose to organize using a corporate structure. Limited liability companies do not undergo a process of incorporation; however, the requirements to legally form an LLC are similar. Each jurisdiction in the country has separate bodies of law that govern the creation of a corporation or an LLC.
If you choose to use a corporate entity to structure your business, you must adhere to the relevant statutes in the state you want to create the entity in. Most jurisdictions require you to file articles of incorporation as the first step to corporate formation. This document must include the name and initial address of the business, the purpose of the corporation, the powers it has, the name and address of each individual involved in incorporating and the number of shares and the type of stock the corporation will issue.
The authority to create an LLC rests with each state and the District of Columbia. However, most jurisdictions have similar requirements to form an LLC. You or an LLC organizer must prepare a certificate of organization and deliver it to the relevant state office. At a minimum, the certificate must include the business name, office address and the name and address of the agent you authorize to accept legal service of process for the LLC. Most states will not file the certificate until at least one member joins the LLC. If you deliver the certificate at a time when no member yet exists, the state provides you with 90 days to deliver written notification of when the first member joins. After the 90 days, the certificate lapses and is void.
Most jurisdictions do not impose restrictions on who may become a member of an LLC. The current members of the LLC are free to draft an operating agreement and tailor membership requirements as they see fit. However, in the absence of an operating agreement, most states require the unanimous consent of all current members to admit a new member. Once you obtain admission to the LLC, you have the right to actively participate in management activities and have a legal claim on a portion of LLC earnings and assets. In contrast, prospective owners of a corporation generally do not need unanimous approval of all other shareholders before purchasing stock.
A business that uses the LLC structure need not incorporate to be taxed as a corporation. The Internal Revenue Service allows all LLCs to elect corporate tax treatment by filing IRS Form 8832. Once an election is made, the LLC and its members must adhere to all corporate tax rules for at least 60 months before a subsequent election can be made. Corporations are solely responsible for all tax filings and payments. Failure to comply with tax regulations has no effect on shareholder liability. If you do not elect corporate tax treatment, the federal tax law automatically designates single-member LLCs as sole proprietorships and multi-member LLCs as partnerships.
Read More: LLC Profits and Disbursement Rules
- “Wiley CPA Exam Review Volume 1”; O. Ray Whittington, PhD.; 2010
- University of Pennsylvania Law School: Revised Uniform Limited Liability Company Act 2006
- Internal Revenue Service: Publication 3402 – Taxation of Limited Liability Companies