Creating a business entity is a great way to start a business and protect your personal assets. And selecting the right type of entity for your new business is something you should put a lot of thought into.
We’ve covered choice of entity many times on our blog and we include links below to other relevant posts.
> How to Choose the Right Business Entity for Your New Business
> Choosing a Business Entity: Sole Proprietor
> Choosing a Business Entity: Partnerships
> Choosing a Business Entity: Limited Liability Companies
In today’s post, we want to look further into the formation and structure of the most well known “limited liability” business entity, the corporation.
Formation & Filings
The first step in creating a corporation is filing a formation document with the Secretary of State in the state in which you want to incorporate. In Kansas and Missouri this formation document is called your Articles of Incorporation. You will state the name of the company, date of formation, its purpose, the number of shares available to be issued, classes of stock and restrictions, and the name and address of your registered agent. The registered agent is the person or organization that accepts service if the company is sued and will receive official communications from the State. Some states require you to identify the officers and shareholders when filing the formation documents. Most states require this information be provided in subsequent annual reports.
The primary reason most owners choose to do business as a corporation is the limited liability created for the owners as shareholders. Provided the company follows the right formalities like adequately capitalizing the business, signing documents under the company name, maintaining its own bank account, and holding shareholder meetings, the shareholders will not be liable for the debts and obligations of the company.
It is important to speak to an attorney about these formalities because if you don’t follow them, a third party may be able to pierce the corporate veil and sue the shareholders directly.
One of the biggest drawbacks of a corporation is that it is taxed twice. This is often known as “double taxation.” This means the corporation will pay taxes on its income, then the shareholders will pay taxes again on distributions made to the shareholders. In some situations, you can select “S-Corp” status to avoid this double taxation. You can read more on that in our post Should My Company Become a S-Corporation.
The most important document for a corporation is its Bylaws. The bylaws will outline how the board of directors is created and changed over time, how shareholder meetings are to be held and how voting works. Many corporations will have additional governing documents like Shareholder Agreements, which create additional rights and responsibilities between the shareholders. Many small businesses incorporate by filing their Articles, which is easy, but neglect to sign these documents. This is a mistake, especially when there is more than one shareholder and the other shareholder(s) are not family. If a corporation has more than one shareholder it is essential to have By-Laws.
Consult with a Business Entity Attorney First
Choosing the right business structure for your new business is important. And together with your attorney, you can walk through the various options and make the right decision for you in your situation.
At Krigel & Krigel, we have many business attorneys that can help you. You can learn more about our Kansas City business practice group and its attorneys on the business law page at krigelandkrigel.com.
*This article is very general in nature and does not constitute legal advice. Readers with legal questions should consult with an attorney prior to making any legal decisions.