The Incorporation Process
There are several steps to successfully incorporating a business, and each of them must be followed closely. The first consideration is where to incorporate the business. If the business will only operate in Arizona, then Arizona is the obvious choice. If the business will operate in more than one state, however, it is best to incorporate in the state with laws most favorable to businesses.
The next step to incorporating a business is deciding upon a name. This means finding an available name by performing a preliminary name search on the Arizona Corporation Commission’s Website, or checking with the U.S. Patent and Trademark Office.
Next, corporations must file Articles of Incorporation with the Arizona Corporation Commission. The standard filing fee for this is $60, and there is an expedited filing fee of $95. In addition to the Articles of Incorporation, corporations must also submit a certificate of disclosure, which properly identifies all of the incorporators. At this time, corporations should also identify initial directors to serve until successors are named, and a statutory agent to receive legal documents on behalf of the corporation.
Corporations have sixty days from the time the Articles of Incorporation were filed to publish them in three consecutive publications of a newspaper where the business will operate. Unless the corporation filed on an expedited basis, the corporation will probably have to publish the articles before the Arizona Corporation Commission issues an acceptance or denial letter.
Lastly, new corporations need to file Form SS-4 with the Internal Revenue Service to obtain a tax identification number. Because corporations must have this number to open bank accounts, pay wages and pay taxes, they should apply for the number early on. Corporations can apply for a tax identification number by fax, by mail, over the phone by calling the IRS, or applying online.
The Organization Process
Once a corporation is incorporated, there is still much to do. This process is known as business organization, and it most times begins with an organizational board of directors meeting, which can be called for by a majority of the initial directors named in the Articles of Incorporation. At this meeting, the directors can elect officers, adopt bylaws and form banking resolutions. Officers are appointed to run the daily workings of the corporation, and generally consist of a President and a Secretary. A corporation can have any number of officers, or just one person can hold all offices. A corporation’s bylaws dictate how the corporation will be run, and outline the rights and responsibilities of directors, officers and shareholders. Banking resolutions dictate how corporate bank accounts will be opened and maintained.
Organizing a corporation also includes issuing stock. Each stock certificate issued represents a portion of the corporation’s ownership, and the shareholder with the most shares of stock has majority control of the corporation. Corporations starting out must decide how to divide the stock among shareholders, and how much each shareholder must pay for each share. New corporations hold some shares in reserve for issuance to future investors.
Corporations should also consider organizing as an S Corporation. S Corporations are taxed quite differently than C Corporations, so it is important to consider this carefully, and with qualified counsel. Corporations eligible for S Corporation status must execute IRS Form 2553 for approval. If approved, the corporation can avoid double taxation by passing all business losses and profits through to the shareholders’ individual tax returns.
Every Arizona Corporation is required by law to hold an annual shareholder meeting. The bylaws must fix a meeting time, and the corporation must provide all of its shareholders with adequate notice of these meetings. While any business can come before the board at these meetings, the most important function of annual meetings is to elect or reelect directors. These elections are critical to the success of a corporation because directors have a wide range of power, including policy setting, electing officers and approving annual budgets. Corporations should document every meeting in an official minute book. Minutes should indicate who was present at each meeting, the information discussed at the meetings, and any resolutions that were made.
Most corporations that plan on selling a product or service that is subject to sales tax must apply for a tax license. Corporations apply for this license by filing an Arizona Joint Tax Application with the Arizona Department of Revenue. Additionally, any corporation that will pay wages must obtain a withholding number and unemployment number, which are also obtained by filing the Arizona Joint Tax Application.
Financing is another thing that corporations must consider in the organization process. Financing for a new corporation can come from a variety of sources, including owners, shareholders and lending institutions. Issuing shares raises capital by selling stock, or partial ownership, in the corporation to shareholders. Corporations can also seek capital contributions from shareholders and owners, which add to the corporation’s capital without requiring it to issue additional stock. Additionally, corporations may borrow capital from shareholders in return for a promissory note.
Outside of seeking capital from owners and shareholders, corporations can also obtain loans from financial institutions. When requesting a loan, corporations should agree upon a note term, or length of time they will have to repay the debt, that is feasible. Almost without exception, lending institutions require a security agreement when providing a loan, under which the corporation gives collateral on the loan. Corporations must execute a financing statement that describes the collateral pledged to the lender in the security agreement. One type of collateral is a stock pledge agreement, which promises a fixed number of shares in the event of a default on the note. Another alternative is a financial guarantee, which promises a fixed sum of money in the event of default. Other alternatives for collateral include assignment of life insurance and deeds of trust on corporate real property. In almost all cases, the lender will require personal guaranties from the shareholders of smaller corporations.
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Buy-Sell Agreements
