There are a number of steps to take when starting a business, but some of the most important are the legal procedures you must undertake to declare your business a corporation. These include submitting the proper articles of incorporation. Depending on the type of business, they are also called articles of organization (for a limited liability company, or LLC) or articles of association (for other business types and/or outside the United States). This documentation contains information about the company that will allow it to be formally established as an entity in the country of interest.
Articles of Incorporation LLC
Most businesses begin either as a corporation or an LLC. By definition, a corporation is owned by its shareholders, while a limited liability company (LLC) can be owned by corporations, individuals, other LLCs, trusts and pension plans. Corporations have well-established rules and regulations by which they operate, which typically involve the shareholders and their decisions. An LLC limits the liability of business owners, which can have some advantages. No matter which route you take, however, you must file the proper articles.
Articles of incorporation also can be called a certificate of incorporation, or a corporate charter. They represent the business’s declaration of intent to operate as a corporation. Articles of incorporation are used for both profit and non-profit organizations, although the price of filing might differ. In the United States, the paperwork is filed with both the federal and state governments. Each state has a slightly different format for submissions, but each asks for the same basic information about the business entity.
If a corporation intends to do business in multiple states, it may need to file articles of incorporation in each state. Every state should have information available online as to how and what to file to legally do business in that state. This information is provided by the Secretary of State for both the state and federal governments.
What Do Articles of Incorporation Include?
A business’s articles of incorporation usually include:
- The corporation’s name and its physical home address.
- The type of corporation: profit, non-profit, professional, non-stock, etc. Some states also require a statement of the purpose of the corporation, which can be a general statement about the company’s business goals.
- The name and contact information for the corporation’s registered agent for service: This agent is the individual responsible for legal actions on behalf of the organization, including service of documents and lawsuits.
- The names of and contact information for the members of the board of directors, including their initial roles in the corporation.
- The names, contact information and signatures of the incorporators: the individuals who are filing the paperwork on behalf of the entity.
- Information about the corporation’s stock, including the number and type(s) of shares the company is authorized to issue and intends to release for sale.
- The effective date of the business’s incorporation.
- If relevant, the duration of the incorporation. Sometimes, corporations are formed with the intent of operating for only a few years. The default duration is in perpetuity if this information is not included.
Incorporated Company Bylaws
This paperwork isn’t just for filing; however, these articles represent the way the corporation will be governed and operated. Many states also ask that the articles of incorporation include company bylaws, which are not filed with the state like articles of incorporation, but the company is required to confirm that bylaws exist.
A corporation’s bylaws are the rules and regulations that will be used to govern the company. They often include:
- The purpose of the organization, spelled out in a more specific manner than in the articles of incorporation. This purpose is what will drive the direction of the company’s business decisions moving forward.
- A definition of the organization of the members of the board, including how each position will be filled (selection, election, etc.) and the responsibilities and rights associated with each position or officer.
- A statement as to how frequently meetings will be held, their subject matter, and the expected attendance.
- Rules about how decisions will be made, which positions are responsible for breaking tie votes or making the most critical decisions, and how decisions can be altered or changed.
- The steps required to make amendments to the bylaws as the company evolves, the board changes, and/or the organizational direction is readjusted.
Who Needs Articles of Incorporation?
Articles of incorporation declare an entity is a registered business in the state, and filing is a required step for a business to become “official” and legal. Many new businesses decide to incorporate to be recognized as a valid corporate entity. The registration of articles of incorporation is required for businesses to set up bank accounts and loans, for example. The filing of these papers formally separates the assets and identity of the business from those of the owner(s).
No matter what type of business, some sort of documentation will need to be filed to make it a valid business in the eyes of the government. An articles of incorporation search may be conducted by anyone to verify you are legitimate.
Sole Proprietorships Are not Incorporated
Small businesses that function as sole proprietorships are, by definition, not corporations. These are smaller businesses owned by a single person, and they do not need to be registered with the state. The difference is that sole proprietorships are not legally separated from an individual, which means that the profits and losses of the business are that individual’s bottom line – and their liability.
A sole proprietorship needs to be a small business that is not expected to grow very much larger than its size at initiation, and it only requires a minimum of paperwork and licensing for operation. Many businesses start as sole proprietorships and make the decision as to whether to incorporate once the company has become established.
General Partnerships and Articles of Incorporation
Much like sole proprietorships, general partnerships are not required to file articles of incorporation. A general partnership is a business organized and run by a set of partners who agree to take on and share full liability for the company. Again, the difference here is the lack of legal separation between the partners and their business, as well as the liability risk on the owners. Partnerships often need to be registered, but they do not require full articles of incorporation unless and until their team of partners makes the decision to incorporate.
Advantages and Disadvantages of Incorporation
The decision to incorporate a company comes with a number of advantages. Corporations and LLCs are viewed as separate legal entities, allowing the owners and shareholders to keep their personal assets separate and protected. This separation limits the financial damage to that owner if the business struggles or goes into debt. A proprietor or partnership may decide to incorporate to sell the business by selling their ownership shares, or they may decide to incorporate to offer stock to attract additional investors.
The disadvantages of incorporating include the cost of filing, which can include state fees as well as lawyers and accountants’ fees to ensure the paperwork is complete. Also, sole proprietorships and general partnerships are not taxed, as their tax structure is routed through the personal taxes of the owner(s).
Corporations and LLCs are taxed differently, and, depending on the business size and operations, they can be more or less expensive than taxes on a proprietorship or a partnership. Articles of incorporation for nonprofits are a different matter entirely and should be discussed with legal counsel.
Deciding to Incorporate
Thus, the decision to incorporate depends significantly on the perspective of the owner(s), their visions for company expansion, and their own objectives and goals. For companies likely to stay small, remaining unincorporated may be a better choice. For companies looking to grow – attracting both investors and employees – and needing a legal separation between owner and business, incorporation is likely the more attractive choice.
While making the decision as to whether to incorporate, the owner or owners should seek advice from a tax accountant and a legal advisor. Financial advice will help the owners determine what makes sense for their company and their own investments in terms of taxation, income and profits. Legal advice on liability and a frank discussion of the risks involved should make it clear to the owners which path makes the most sense.
Obtaining Articles of Incorporation
As stated, articles of incorporation are offered by the Department of the Secretary of State and/or the Treasury Department within the state of incorporation. All the information needed regarding articles of incorporation should be available on the state government website. These forms can be easily downloaded.
To fill out articles of information, the filing individual will need all of the information listed as needed by their state. Luckily, a good number of websites are available that offer template language for articles of incorporation that need only to be edited to be relevant to the specific business being registered. These examples can be easily found online and provide a good frame of reference for anyone looking for examples.
Articles of incorporation need to be comprehensive, but they do not need to be long. They do not need to be complicated. In fact, simple statements will suffice to provide all the information needed without unintentionally limiting the operation of the corporation in the future.
Legal Advice Is Best
While anyone can complete and file for articles of incorporation, it’s best to seek the advice of a lawyer when doing so to ensure everything in the documentation is correct. Since the articles of incorporation and the company’s bylaws are often created at the same time, it’s best to complete them with a legal advisor to craft clear, simple, strong documents that will fit the company’s needs.
Legal and financial advice should be sought when determining which types of stock to offer, how many shares, and the cost of shares, which includes the determination of share distribution to current investors.
Submit Online in Most States
Articles of incorporation can be submitted online in many states. The state’s website should offer the option to submit online. Likewise, many online legal agencies will guide the incorporator through the submission process, providing advice as to what information to include. The specific wording will provide the best definition and protection for the entity.
If working with legal counsel, the lawyer’s office may prefer to file the papers themselves. At any point in a corporation’s lifetime, a copy of the articles of incorporation should be available upon request from the office of the Secretary of State. It normally takes three to six weeks to obtain notification that the articles of incorporation have been filed, but this depends on the state and how backed up their secretary of state’s office might be at any given time.
The paperwork for incorporation may be simple and straightforward, but the decision to incorporate a business is one to make carefully by the owners, partners, investors and potential future members of the board.