Incorporating a business involves more than just filing the articles of incorporation with the state’s secretary of state. Failing to perform the necessary additional steps can create financial and legal problems. What follows are 5 essential steps in business incorporation:
Choose Your Management Team
The selection of a board of directors is a straightforward but essential task in a valid incorporation. Based on the type of corporation or state of incorporation, the number of directors, however, may greatly vary. Fortunately, in many states, only one director is required, which means you can simply appoint yourself as the director. In California, however, if you have three or more shareholders, you will need to have a minimum of three directors. In addition, you will need to appoint three officers: a President, Chief Financial Officer, and a Secretary. One person may fulfill all three positions.
Obtain an EIN
An Employer Identification Number (EIN) is like a social security number for businesses. An EIN is required to distinguish a business as a separate legal entity. Obtainable from the IRS’s website, this number enables one to perform a series of tasks including file taxes, open a bank account, and even receive payment from customers.
Issue Valid Stock
Often overlooked in business incorporation, is the actual issuance of stock to the shareholders. Stocks represents ownership in a corporation. Validly issuing stock involves several necessary steps: (a) sufficiently authorized but unissued stock must be listed in the articles of incorporation, (b) a board resolution must be passed authorizing the listed stock, (c) the corporation must issue stock certificates, (d) a stock purchase agreement must exist between the corporation and each founder, (e) the purchase price must be paid to the corporation, and (f) the stock must be listed on a stock ledger for the corporation. In deciding whether stock has been validly issued, a court will decide how many of these elements have been satisfied.
Create Adequate ByLaws
To ensure a valid incorporation, a corporation must draft adequate bylaws and record board minutes showing that the board has adopted these laws. These bylaws will include elements like: (a) the name of the company, (b) the number of members of the board of directors and how they are elected, (c) when and how shareholder and board meetings may be held, (d) the appointment of officers and their respective duties, and (e) certain information about stock certificates.
Ensure a Shareholders Agreement Exists
A Shareholders Agreement fulfills gaps left by even the most adequate bylaws. While bylaws detail daily operations of a corporation, Shareholder Agreements address specific rights and obligations of shareholders. Some common provisions in Shareholder Agreements include (a) voting rights, (b) restrictions on voluntary and involuntary transfers of stock, (c) buy-out clauses, (d) noncompetition obligations, and (e) death incapacity, or divorce of a shareholders. Shareholder Agreements are sometimes forgotten in business incorporations, but essential because laying down specific shareholder rights and duties can prevent many potential problems in the event of unforeseen circumstances.
Fear not if you later wish to make any alterations to your company. Any decisions made about company formation can always later be changed by filing an amendment.
For further information on how to properly incorporate your business contact Afshin Hakim of The Hakim Law Group, one of the most reputable business lawyers in Los Angeles who will successfully help every step of the way.