How to Get (and Maintain) Your Corporate-Status
Obtaining “corporate-status” for a business is a major step with important implications in terms of asset protection, taxation, and general day-to-day operations. To gain this coveted status however, owners are required to file a number of formal documents with their state agencies (typically the Secretary of State).
The documents required to incorporate a business depend on:
- The exact type of business structure (namely, LLC vs. corporation)
- The state in-which it will operate
For LLCs, these documents usually include the business’ Articles of Formation and its Operating Agreement. For corporations on the other hand, states often request the business’ Articles of Incorporation, Shareholders’ Agreement, and its Bylaws.
Clearing the small but significant hurdle of collecting, completing, and filing this documentation will—if approved—result in the incorporation of your business. However, many owners fail to realize that their corporate-status is conditional, and can in-fact be revoked if the businesses fails to follow the rules and formalities associated with incorporation.
To Incorporate, or Not…
Choosing (or changing) a business structure is an important decision for any owner. Most businesses begin as sole proprietorships or partnerships, simply because new companies tend to be small-scale operations with a relatively straight-forward ownership structure. However, what happens when a company is thriving and looking to expand?
As a small-scale operation grows, so does its legal obligations, financial requirements, and operational complexity. In these instances, many professionals advise owners to consider incorporating their business. In this context, incorporation only means registering your business structure (usually) as an LLC or corporation. While many businesses begin with a simple business structure such as a sole proprietorship or partnership, it’s advisable to change that structure to accommodate the growing complexity of the company.
The advantages to incorporating your business are plenty. Perhaps the single most attractive benefit is asset protection. By incorporating a business, an owner is legally distinguishing their personal assets from their business assets. In other words, the liability and financial obligations of the business—things like company loans, ongoing legal claims, and other business debts—are completely disjoint from the personal accounts of the owners. This provides a layer of personal protection (sometimes called a corporate veil) for corporation owners. Owners of sole proprietorships or general partnerships simply don’t enjoy this protective layer.
Asset protection isn’t the only advantage to incorporation. Many owners choose to incorporate because of the differential tax treatment (when a business is incorporated, its tax responsibility is treated separately from an individual owner’s tax responsibility, another instance of the corporation and the owners being treated as separate legal entities).
Knowing the Rules of Incorporation:
Again, obtaining corporate-status is a significant accomplishment for a business, but make no mistake: this status is conditional. Namely, incorporated businesses (regardless if they are LLCs or Corporations) must adhere to a state-mandated set of rules and formalities associated with incorporation.
The particularities of these rules can vary depending on state-specific legislation. Here are some of the more commonly enforced requirements:
- Maintaining Records and Documentation – incorporated businesses are required to keep well-maintained and organized company records, including business ledgers, company minutes, and shareholder records. These records provide evidence for the legitimacy and compliance of your corporation or LLC.
- Regular Shareholder & Board Meetings – businesses are required to hold regularly scheduled shareholder meetings and meetings for the board of directors. There should be evidence that these meetings indeed took-place, such as transcripts or signed/dated records.
- Adherence to the Company Formation Documents – important organizational documents like a company’s bylaws or operational agreement should be followed closely. These documents set the rules for the incorporated business, and deviating from these pre-established protocols will appear suspicious to regulatory officials.
- Making the Appropriate Tax Filings – one of the benefits of incorporation is the differential tax treatment. Businesses that illegally take advantage of this taxation may have their corporate status revoked.
- Maintaining Separate Personal and Business Accounts – since a corporation’s assets are treated separately from an individual owner’s assets, owners aren’t permitted to claim company assets as their own personal assets. Thus, it is critical for a business to have its own bank account. This is a rather serious offence that can result in penalties extending beyond losing your corporate-status.
- Refraining from Criminal Activity – although obvious, it’s worth mentioning that owners who engage in incriminating business practices (including fraud or wrongdoing) will undoubtedly lose their corporate-status.
Incorporated businesses that fail to adhere to these regulations can lose their corporate-status, meaning that the owner(s) may be personally labile for company actions or responsible for the repayment of company taxes.
These consequences are often-times only the tip-of-the-iceberg. When a company loses its corporate-status, the protective barrier that once disassociated the owner and the business can also be broken (in some situations this protective barrier is called a veil, and its breech is called piercing the corporate veil). Once the corporate veil is pierced, owners are at-risk for any/all liabilities associated with their company, including unpaid loans, legal claims, or other debts.
For these reasons, understanding and obeying the rules of incorporation that apply to your particular business cannot be overstated. Remember, these rules are largely state-specific. It may be wise to contact your local state agencies (or to consult an experienced business attorney) to ensure your operation is in-compliance with the regulations in your state.