It’s possible to form your own corporation without professional help. Every day, many entrepreneurs do exactly that using online resources or an incorporation kit. The obvious motivating factor for setting up a corporation on your own is to save on legal fees, which can range from $1,000 to $2,000 or more, depending on where you live. But be aware that there’s a trade-off: You’re subjecting yourself to bureaucratic hassles and, unless you do your homework carefully, possible errors. The paper-filing phase, by itself, isn’t all that difficult. But tax and legal liability problems may not be obvious to the do-it-yourselfer. And if you plan to issue stock to other than a few people who will work in the business or are close friends and relatives, securities laws can be troublesome.
Still, dollars are often precious to people just starting out in business, and you may decide that it’s worthwhile to attempt to form your corporation by yourself. If you choose that route, it’s a good idea to have a lawyer experienced with small businesses look over the final documents before you file them. You should be able to find a lawyer willing to do this at a fraction of the cost of having the lawyer handle the matter from beginning to end.
Beware of securities law. If you’ll have a number of shareholders—especially people who won’t be working in the business and who are not close relatives living in your state—consult a lawyer to see that you’re in compliance with federal and state securities regulations. Although most small businesses are considered to be closely held corporations and exempt from these potentially complicated regulations, it’s worth spending a few bucks to find out for sure.
While there are differences from state to state, the basic procedures that you or your lawyer will follow in creating a corporation are these:
• prepare and file articles of incorporation
• select a board of directors
• adopt bylaws
• elect officers
• issue stock, and
• decide whether or not to elect S corporation tax status.
There's one additional step to consider before starting to incorporate: a preincorporation agreement. It may be unnecessary if you’re planning a one-person corporation or if your corporation consists only of family members. Similarly, a preincorporation agreement is less necessary if you and your associates are incorporating an existing business or if you’ve done business together before. However, if you’re going into business with relative strangers, putting your agreement in written form will help you avoid disputes later or, if an argument does arise, will provide a basis for resolving it through arbitration or litigation. Your written agreement should include these key points:
• the name of the corporation
• its purpose
• how much stock each person will buy and how he or she will pay for it
• what loans each person will make to the corporation and the terms of repayment
• what offices (president, vice president, secretary, treasurer) each person will hold
• what compensation each of you will receive
• what expense accounts each of you will have, and
• what fringe benefits will be available.
If the corporation is going to lease real estate or other property from one of the owners, the agreement can also outline the terms of that transaction.
Another major topic to cover in either a preincorporation agreement or a separate buyout agreement is what happens if a shareholder wants to retire from the corporation, gets sick or dies, or just wants to sell his or her stock. Will the corporation or the remaining shareholders be obligated to buy the stock? How will the price be set? Can the stock be sold to outsiders?
These are difficult and important issues—and it’s much better to think them through and arrive at a written agreement at the beginning of the corporation’s life rather than wait until a crisis arises. If you don’t have an agreement in place, you risk the pain of personal and business discord, and possibly even expensive, disruptive litigation.
Whether or not you decide to get a lawyer, check out Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, or How to Form Your Own California Corporation, both by Anthony Mancuso (Nolo). These books provide information about incorporating, even if you decide not to do it yourself.
Excerpted from Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo).