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Many startup entrepreneurs begin their businesses as a sole proprietorship. That is the easiest and quickest way to begin working as “your own boss.” Without question, being a sole proprietor is effective — for at least a short while. After a time and after your business is succeeding and making money, however, this is often time to incorporate your business. Below are some common questions about setting up a California corporation.
When Should I Incorporate?
Some entrepreneurs incorporate as part of the startup process. This is very common when investors are funding the startup; the investors must have a business vehicle into which to make their investment. Few investors will provide startup capital to a sole proprietorship. Forming a corporation at the very beginning is often a good strategy even if you are running your own business without startup capital from investors. Most new businesses require an infusion of capital for the first couple of years. Forming a corporation is just one of the many startup costs. On the other hand, if you have been running your business as a sole proprietorship, forming a corporation is essential at the point where the business is making money and you have decided to continue running the business. Sometimes, starting a business is done as a “test run” to see if the business is viable. Once you determine that your business will likely succeed, that is the time to incorporate.
How much does it cost? — The cost of forming a business entity varies depending on the circumstances of the individual business. The type of entity you form will determine some of the filing fees, the amount of money you are putting in to capitalize the business, or get it started and buy the stock/membership will determine other filing fees. The type of entity and complexity of the setup and also the timeline of formation all impact the cost. Contact an experienced corporate attorney to discuss the benefits of incorporating your business and to understand what kind of costs would be involved for your situation.
How long does it take? – Formation times can vary throughout the year, some times are busier than others for the California Secretary of State. Standard filings can take four to six weeks, and expedite options are available for those who want the articles processed faster. There are other steps involved after the articles of incorporation are processed and returned by the Secretary of State, so be sure to factor in the whole process when planning to form your business and consulting with your experienced San Diego corporate attorney.
Why is incorporation so important to a successful business? – There are several important benefits to having a corporation, which vary from business to business. Since there is some cost, incorporating is a sign that your business is making enough money to warrant having a corporation. But incorporating is more than a sign of success. Your new corporation becomes a separate legal entity with its own ability to act in the world. For example, your corporation can sign contracts, open a bank account, obtain a tax ID number, file a lawsuit, defend a lawsuit, buy real property, register a trademark, and much more. This provides a tremendous expansion of potential activity for your business. Further, because your business is now incorporated, your business creditors are generally only allowed to go after business assets if there is a default on business obligations. This protects your personal assets. Your corporation can also begin establishing a business credit rating that is separate and apart from your own personal credit rating. Having a corporate tax ID number also allows you to operate your business without using your social security number. And many vendors and suppliers will only work with a business that has a business tax ID number. This usually saves your business a lot of money.
Are there options in terms of the type of corporate entity? — Yes, you have some choices with respect to which type of corporate entity you can form. An experienced corporate attorney can provide some advice and counsel on which form is most appropriate for you and your business. A tax professional can also provide information, since each corporate form has unique tax treatment. Among the choices are:
- Standard corporation — what is called a “C” corporation
- Pass-through corporation — what is called an “S” corporation
- Limited liability company
- Professional corporations — limited to those who are professionally licensed
- And others
What is needed to start the process? — There are a few things needed before you can file your articles of incorporation. First, you need to know who will be the owners and you need a unique name for your new corporation. Sometimes, that is easy if there is only one owner. Other times you may need to have an agreement among the owners setting out what percentages of the company will be owned by which owners. Again, your San Diego corporate attorney can help. Second, you need a unique business name, an address and a person who will be designated as your registered agent. There is more to forming a business entity than just submitting articles to the Secretary of State, such as adopting bylaws, appointing officers and directors, issuing securities, and other items. Contact an experienced corporate attorney to ensure that your corporation is formed properly and that all your business legal needs are met.
Contact San Diego Corporate Law Today
For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard provides a full panoply of legal services for businesses including formation of corporate entities of all types. Like us on Facebook.