When starting a business, one of the most critical steps is identifying what the structure of your organisation will be. There are several ownership options you can consider, each with a unique set of strengths and weaknesses.
Generally, a business corporation – or Limited Liability Corporation (LLC) – is the most robust of these choices. LLCs are not restricted to the realm of "big" business, either; size is not an obstacle when incorporating your business, and even a small venture can be structured in this way.
However, while, in the long term, LLCs compare favourably to sole proprietorships and partnerships, they are not the easiest form of ownership to implement. In most jurisdictions, you will have to jump through a number of hoops to register your corporation, but as long as you plan carefully, there is no reason why you can't achieve such a status.
This is how to incorporate a business in seven simple steps – no matter where in the world you are.
1. Pick a Name for Your Corporation
A business corporation has a separate legal identity and, therefore, needs a name. Think carefully about your choice, though; ideally, it should have some level of resonance with what your company stands for, as well as be something that you can use to attract potential customers with ease.
Be wary of trademark infringement, too. Use an online trademark search engine, or a local regulatory authority, to check if another company is using your chosen name. If another registered corporation has already claimed it, then you cannot legally use it.
Also remember that, due to their use by government bodies, many countries have laws restricting the use of specific terms, such as "national", "federal", and "reserve". After consulting with your local regulatory body, you may be able to add designators such as "Inc.", "Corp.", or "Ltd."; indeed, some jurisdictions require that you use certain identifiers.
Given the rapid rise of e-commerce and digital marketing, having an online presence is also important. Therefore, you need to check if your chosen name can be used for a website or domain online. If it is unavailable, or the domain is not for sale, you might want to consider another name.
Once you finalise your company's name and title, the next step is to register it with your local relevant government agency. This will ensure that no other entity can use it while you are getting your business up and running.
2. Find and Appoint a Board of Directors
You cannot legally form a corporation without a board of directors. However, while this is a universal requirement, the specifics regarding the composition of the board can vary between jurisdictions; some have minimum requirements on the number of directors, while others do not.
Therefore, the first thing to consider when forming a board is how big it will be. Ideally, you want an odd number to avoid any ties during future decision-making processes. As a guide, a small corporation can often make do with five to seven members, while larger, more complex organisations will likely require up to 11 board members.
As an owner, you are free to join the company's board; that is the straightforward part. The harder one is deciding who else to appoint. One common mistake you should avoid, though, is picking a family member or friend (or at least picking someone based solely on that relationship).
The search for members should be a comprehensive and thorough process where you consider the following factors:
- Expertise - Pick people whose skills could be useful to the business, such as experienced lawyers or accountants.
- Experience - Ideally, each appointment should have some management experience, preferably in the same sector as your corporation.
- Commitment - Try to find individuals who have the time, energy, and interest in working for the future of the organisation.
- Integrity - Directors should be honest, principled individuals with no prior criminal record, or have any conflicts of interest with your organisation.
- Finance - Though not mandatory, board members with connections and easy access to capital can make life a lot easier during the treacherous early stages of your enterprise.
3. File the Articles of Incorporation
The articles of incorporation refer to the primary legal document that officially establishes your corporation in the eyes of the law. The filing is usually done at the offices of the government body that is responsible for commerce in your country.
Despite the somewhat ominous title, the document itself is relatively simple and easy to fill out. It is usually available as a printed form where you provide all the essential details of your new corporation, including its name, the names of the directors, the address of the office, and any other contact details. You will also have to appoint someone within your organisation to act as an official point of contact between your LLC and the authorities.
4. Create Bylaws and a Shareholder's Agreement
Every organisation needs a set of rules and a code of conduct; in a for-profit organisation, such laws are called bylaws (you can find examples at your local commerce regulatory body). In an LLC, these laws are usually related to internal matters, such as record-keeping, issuing stocks, and the composition of the board.
Although you do not need to mention these details in the articles of incorporation, they are crucial for the proper functioning of your firm and due care should be taken when drafting them.
While bylaws are virtually mandatory, a shareholders' agreement is more of an optional extra. It is still a useful document, though; for example, it dictates how the ownership shares will be transferred (and to whom) in the event of your resignation, retirement, or death.
It is highly recommended that you consult with an experienced attorney when creating both these documents. You will also have to call a meeting of the board to ratify these documents officially.
5. Acquire Permits and Licensing
Before it can function as a business entity, your corporation needs to obtain any necessary permits and licenses from the relevant authorities. The type and number of these permits will ultimately depend on your industry, as well as your country and state laws. For further guidance – and to ensure you don't miss anything – you will need to consult with your country's governmental commerce body.
6. Register for a Tax ID
As a separate legal entity, an LLC has to pay taxes to the government. Here you can decide between two types of corporations – a "C" corporation, or an "S" corporation. Each has its pros and cons.
This decision will have to be made with your board and is ultimately dependant on the needs and financial status of your business. Either way, though, you will have to contact your local tax authority or revenue department and obtain a registered tax ID for your company.
7. Distribute Stock
Allocating shares is one of the final mandatory steps in the creation of a corporation. Within this type of structure, ownership must be divided into shares of company stock, which is then distributed to shareholders; in a smaller business with fewer than ten owners, this is a relatively painless and straightforward process.
However, in a large enterprise, most regulatory authorities demand adherence to a comprehensive registration process, which can take a lot of time and effort. Your board can also create and authorise stock purchase agreements if needed. These form the rules under which an owner or founder can buy stock from the company.
Many fledgeling entrepreneurs and business owners may feel as though their company is too small to be incorporated, but this isn't the case. As the above steps show, it's also not as convoluted as many believe, either; as long as you are prepared and organised, there is no reason that you can't form a corporation and enjoy the many benefits that come with implementing such a structure.
What else is important to consider when incorporating a company? Let us know your thoughts or experiences in the comment section below.