1. The Definition: What are Articles of Incorporation?
An Articles of Incorporation, also known as a Certificate of Incorporation, is a set of formal documents containing basic information about a company being created. Because each state has its requirements, this document is usually filed with the Secretary of State. Once the Articles are filed, the company becomes a registered business entity in the state for legal and tax purposes.
Your essential document includes the following details:
-
Full Name of Corporation: check whether the company name is still available at your Secretary of State (i.e., California allows you to check online), and be sure to include one corporate suffix at the end of the name:
- Corporation or Corp.
- Company or Co.
- Incorporated or Inc.
- Limited or Ltd.
- Principal Place of Business: address of the corporation
- Registered Agent: person or business who receives legal notices and paperwork
- Business Purpose: the reason your corporation is being created (i.e., any lawful activity)
- Stock: total number of authorized shares, type of stock, and par value of the stock (include a stock certificate)
- Incorporator: a person at least 18 years old who is setting up the company
- Director: person(s) who will oversee the overall affairs of the company
- Officer: person(s) who will manage daily business affairs (i.e., President, VP, Secretary)
- Duration: length of time the company will exist, often the default is “perpetual”
- Filing Fee: a one-time fee ranging from $35-300 when you first file paperwork
- Franchise Tax: an annual fee based on the company’s net worth or capital held
- Email Address: provide an electronic address for the primary contact person
- Effective Date: future effective date must be within 90 days of the filing date
- Limitation of Director’s Liability: some states allow the liability of their directors and/or officers to be expanded, limited, or eliminated
- Tax Closing Month: when the company will close its books for accounting and tax purposes (i.e., the annual report is due April 15 in Kansas if December is the closing month)
2. Should I Incorporate my Business?
Below are the major pros and cons of incorporating a business. Before deciding, you discuss these advantages and disadvantages with your legal or financial adviser.
Pros of incorporating a business:
- protects the owner from the corporation’s liability
- ability to raise capital through the sale of stock
- provides employees with the opportunity to buy stock
- establishes a clearly defined business structure
- easier to transfer ownership
- potential tax savings
- may give your business more credibility
- corporations can have an unlimited life
Cons of incorporating a business:
- expensive filing fees
- it’s a troublesome and time-consuming process with lots of paperwork
- must keep detailed records of finances, shareholder meetings, and corporate decisions
- risk of double taxation
If you want to take advantage of a state’s tax and legal benefits, you should file a Certificate of Incorporation with that Secretary of State when creating your business. For example, about half of public corporations choose to incorporate in Delaware and Nevada to save taxes. Many states require companies to file “foreign registration” documents if they are an out-of-state entity incorporated elsewhere but doing business in their state.
A New York Times article highlights how Delaware thrives as a corporate tax haven for nearly half of all public corporations in America.
Independent of where you incorporate, companies may also need to create corporate bylaws to formalize the incorporation process. Corporate bylaws establish the standard rules and guidelines for running a business and not mixing your debts and assets with those of your business.
3. The Consequences of Not Using This Document
As an unincorporated business, the law treats you and your business as one entity. If you do not use an Articles of Incorporation, the default assumption is that you are a sole proprietor. For tax purposes, the IRS allows you to file one form for yourself and your company. In the worst case, a creditor can go after your personal and company assets for business debt.
Here are some possible consequences that could be prevented by properly incorporating your business.
| Consquences of Not Using Articles of Incorporation |
|---|
| 1. Lost Money |
| Unexpected legal bills to defend against lawsuits |
| Potential tax savings associated with incorporating |
| 2. Lost Time |
| Time spent defending your personal assets from creditors or the public |
| Cleaning up mistakes instead of preventing them in the first place |
| 3. Opportunity Cost |
| Loss of liability protection available to incorporated businesses |
| Peace of mind that your personal home and bank accounts are protected |
In contrast, a formally incorporated business legally separates you from your company if you follow proper procedures. The owner cannot be personally liable for company debts, obligations, or risks. The increased liability protection is beneficial if your business has employees or if your products or services put you at risk of being sued by the general public. Retail businesses in danger of lawsuits for a slip and fall or other minor mishaps should consider purchasing general business liability insurance to cover accidents. Forbes similarly covers the different types of insurance small business owners should consider when setting up shop.
4. Articles of Incorporation FAQs
What are Articles of Incorporation?
An Articles of Incorporation is a set of formal documents that contain basic information about a company being created. Because each state has its requirements, the document is usually filed with the Secretary of State. Once they are filed, the company becomes a registered business entity in the state for legal and tax purposes.
What should the corporation name include?
The corporation name should be the corporation’s full name with a corporate suffix at the end (i.e., Co., Corp., Inc., Ltd.). Some states allow you to check online whether your company name is already taken and registered. Check with your Secretary of State to ensure your company name is still available to prevent your filing from being rejected.
What is the corporation’s principal place of business?
Include the complete address and location of where the company conducts its primary operations and business.
What should be included for incorporation?
Many companies use an open-ended and broad purpose (i.e., any lawful activity) in case they expand businesses or operations.
Who is the registered agent?
The registered agent is the person or business entity that receives legal notices and paperwork for the corporation. For Connecticut, the resident agent can be a natural person who is a Connecticut resident or a Connecticut corporation, LLC, LLP, or statutory trust. Or, if the agent is not a Connecticut domestic entity, then it must be an entity that has procured a certificate of authority to transact business in CT.
What to include if the registered agent is an individual?
If the resident agent is an individual, include the individual’s residence address.
Who is the incorporator?
The incorporator is the person who prepares and signs the Articles of Incorporation and files them with the Secretary of State.
Who is the director?
The director is the person(s) who will oversee the overall affairs of the company. Including a director is optional for Connecticut.
Who are the officers?
The officers are the person(s) who will manage daily business affairs (i.e., President, VP, Secretary) for the company.
What is authorized capital?
Authorized capital is the amount of stock that the company will issue and determines the worth of the company when incorporated. Include information like the total number of authorized shares, type of stock, and the par value, if any.
For Connecticut, if the corporation has more than one class of shares, it must designate each class and the number of shares authorized within each category.
What is a Benefit Corporation?
Suppose the Corporation elects to be a Benefit Corporation in addition to any other stated purposes for which the corporation is formed. In that case, the corporation will also have the purpose of creating a general public benefit as defined in the Connecticut Benefit Corporation Act. Suppose the corporation also seeks to have one or more specific public benefit(s) in addition to the general public benefit. In that case, the corporation specifies what public benefit(s) are in the articles of incorporation.
