Choose the Correct Corporate Structure
There are three types of corporations: S corporations, C corporations and limited liability corporations (LLCs). C corporations are taxed twice: once when the business makes a profit and then a second time when those profits are distributed to shareholders. S corporations and LLCs avoid this by passing all tax liabilities onto shareholders. If you plan on creating a large publicly traded company, choose a C corporation because shares of its stock are most easily transferred. S corporations are limited to no more than 75 shareholders, all of whom must be individuals. LLCs have no limit on the number of shareholders, and those shareholders can be corporations and partnerships. Generally speaking, LLCs are best for smaller startups and C corporations are best for larger ones.
Keep Personal and Corporate Matters Separate
After you have incorporated your business, it must remain financially and legally separate from any of its shareholders in order to preserve the benefits and protections of corporate legal status. Maintain healthy business procedures like keeping specific records and accounts, filing necessary government documents, and holding regular shareholder meetings or getting written consents or waivers from directors and shareholders.
Get Your Company Name Right the First Time
Choose your company name carefully. If you change it later, you will need to amend your Articles of Incorporation, change your domain name, obtain new listings in telephone and other directories, and purchase new stationery and business documents. Do your homework and get the name right the first time.
Infuse Your Corporation with Enough Capital
The corporation at inception typically needs to sell stock to its founding shareholders as part of properly organizing the corporation. This stock sale is sometimes referred to as capitalizing the corporation, and the purpose of the sale is to inject startup funds into the corporation to get it going. Although no minimum amount of money needs to be contributed to properly form a corporation, you should consider capitalizing the company with sufficient funds to meet its anticipated early needs in order to avoid potential personal exposure to the shareholders.
Craft Your Corporate Bylaws Carefully
Each state has some form of a Business Corporation Act that governs the lawful operation of corporations and other business entities. If your bylaws do not cover the basic requirement for operation and management of your corporation, by default, the statutes within your chosen state’s Business Corporation Act will.
Maintain Separate Accounts
In order to assure your corporation is treated as a separate entity from its owners, the corporation must maintain separate bank accounts from its owners. You may not treat your corporation’s bank accounts, checking or otherwise, as your personal accounts. Resist this urge completely.
Always Sign Documents with Your Corporate Name
Officers should always sign documents and transact business in the name of the corporation, with the officer’s title clearly written next to his or her name and signature. If an officer does not sign on behalf of the corporation, a third party could claim that the officer is personally liable for a corporation’s default.
Avoid Personal Liability
One of the key advantages to forming a corporation as your business entity is that if it is properly formed and operated, creditors should not be able to successfully sue the corporation’s shareholders for their personal assets. This is what is known as limited liability. If something goes wrong, the shareholders will have only risked what they invested in the corporation and not their personal assets.