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What Does It Mean To “Incorporate” A Company?

Incorporation is the process of establishing a statutory corporate entity to own assets of a business, and to operate that business as the statutory entity, rather than to operate it as a sole proprietorship or some other form of entity such as an LLC. It’s the same concept as a limited liability company, which is also a sheltering entity intended to protect the owners from liability for others’ actions within the business operations. A corporation is considered a “person” for most legal purposes. It differs from an LLC because a corporation is required to establish a board of directors, elect officers, conduct meetings and otherwise operate under the “corporate” requirements of the Corporations Code rather than the limited liability company act.

California corporations will typically be organized so that the owners and shareholders are all individual residents of the state of California, and there are no characteristics that would prevent it from making an S corporation election. Most modern businesses are operated as either LLC or an S corporations because of the efficiency of taxation.

Is Incorporating A Company Difficult?

The process of incorporation is fairly straightforward in terms of the documentation required, starting with articles of incorporation, typically a one-page document that has to meet certain statutory requirements and is filed with the Secretary of State. The corporation is assigned a corporation number and registered in state records. Additionally, well-formed corporations will have a set of bylaws, which are the operating rules of the entity, comprehensive first meeting (and annual) minutes of the board and shareholders and employment agreements for key personnel.

Buy and sell agreements are typically executed in anticipation of the eventual departure of shareholders, sale or closing down of the entity. Corporations are also required to keep regular (at least annual) minutes of meetings of the shareholders and the board of directors. As part of the formation process, the attorney will prepare a set of “first meeting minutes” that make certain mutual fundamental decisions such as what the business of the corporation will be; whether an S corporation election will be made; what contributions the individual shareholders will make to the company (cash, a contribution of assets, services, intellectual property or some combination of those assets) and who will manage and control the corporation.

An annual domestic stock statement must also be filed with the Secretary of State, and most corporations must also file state and federal income tax returns. In addition, if there are employees, they will have to register with the Department of Labor and take out workers’ compensation insurance. These requirements also apply to LLCs.

What Is The Difference Between Forming A Partnership, A Sole Proprietorship Or A LLC?

A sole proprietorship, which is the ownership of a business directly by an individual, requires no documentation to be formed. In California, a married couple operating a business is considered a sole proprietor. A sole proprietorship is the default position for people operating a business: if they do not form an entity as a protective sheltering entity or some other type of business structure such as a general or limited partnership, it will be a sole proprietorship. A general partnership can also be formed with no formal documentation filed with the Secretary of State or even a private written agreement. It’s essentially the default status for two or more people who operation a business together without going through the formal process of forming a corporation or an LLC.

A properly formed general partnership (in those relatively rare situations in which it becames the entity of choice) will have a written agreement going in, because its partners will face the same issues as the LLC or corporation with regard to determining who are the day to day decision-makers, what each partner is to contribute to the entity, whether the partners will work part- or full-time; and whether they will receive a salary for their time, the rights the partners have to assign or transfer their interests, and whether the other partners will have a first right of refusal to buy an interest to prevent outsiders from becoming “involuntary” partners.

For more information on Incorporating a Company, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (916) 635-0302 today.