Incorporating Your Business

You’ve come up with a great business idea, and you’ve read Business Entity 101. You’ve even decided that a corporation is the right form of entity for your business. How do you form one in Ohio? Like most issues, the steps are relatively straightforward; it’s the details you should be most concerned about.

1. Choose a Corporate Name
   
2. File Articles of Incorporation
   
3. Obtain a Tax ID Number
   
4. Draft Corporate Bylaws

Choosing a Corporate Name

The general rule is that a business name must be distinguishable from the name of any other domestic or foreign corporation, limited liability company, limited liability partnership, limited partnership, or trade name previously registered with the Secretary of State. You can check to see if another business is already using a name here. In future posts, we’ll cover whether you should also trademark the name of your business. 

Filing the Articles of Incorporation

A corporation is created by filing Articles of Incorporation with the Ohio Secretary of State. The form is available here. The corporate articles must include:  

• the name of the corporation, which must include “Company,” “Co.,” “Corporation,” “Corp.,” “Incorporated,” or “Inc.”
  
• the city and county where the corporation’s principal office will be located; 
  
• the authorized number of shares of stock, their classification, and their par value, if any; 
  
• any initial stated capital; and
  
• an original appointment of statutory agent.

Number of Shares: The authorized number of shares of stock is the total number of shares the corporation is authorized to issue at any given time. The corporation can choose any number, but there are additional fees payable to the Secretary of State when the corporation is authorized to issue more than 1,500 shares of stock. 

Class of Shares: Shares can be classified as either common or preferred. If all of the shareholders will have the same rights (i.e. voting on corporate matters and receiving dividends), then everyone gets common stock. Preferred stock is used when one class of shareholders will have some additional rights compared to the common shareholders. For example, a major investor in the corporation may want the right to elect a certain number of directors, receive a higher dividend, have a different number of votes per share, or even receive priority payment if the corporation is liquidated. These types of preferential rights can be given to preferred stockholders. However, the express terms of each class of stock must be in writing and filed with the Articles of Incorporation.

Par Value: The par value of a share of stock is the share’s nominal or face value. Because par value has no relationship to the value the market places on a share of stock, the par value is essentially whatever the Articles of Incorporation say it is. For this reason, the par value is usually listed as no par value or an extremely low value, i.e. 1 cent per share. (As a concept, par value is really only relevant when you are dealing with debt instruments like bonds or if you happen to be an economist.)

Initial Stated Capital: The initial capital is the initial amount of money that will be used to start the business. Directors and officer of the corporation can be liable for corporate debts if the corporation starts business without the initial capital actually being paid into the corporation. Therefore, it is best not to state an initial capital amount. (However, that does not mean that the corporation should start business without being adequately capitalized. Doing so can still open the directors and officers up to personal liability.)

Statutory Agent: The corporation’s statutory agent is the person or entity that is authorized to accept legal process for the company. In other words, if the company is sued or if there is an official notice from the Secretary of State, who will be responsible for receiving that information and sharing it with the company? In small companies, this is often the entrepreneur/owner, but it can also be the company’s attorney or law firm. The agent must be a resident of this state (if the agent is a person) or authorized to transact business in this state (if the agent is another business entity). The agent must sign the articles of incorporation accepting the appointment as statutory agent. The name and address of the corporate agent must be kept up to date with the Secretary of State. Failing to do so can result in the cancellation of the corporation’s articles and the loss of the right to legally conduct business in Ohio.

The Articles of Incorporation may also name the initial directors of the corporation, the purpose of the corporation, a period of existence for the corporation, and the effective date of organization of the corporation. Generally, the purpose of the corporation will be the following commonly used purpose language or something similar: “to engage in any lawful act or activity for which a corporation may be formed.” This gives the company the flexibility to expand or broaden the business as time goes on. The default period of existence is perpetual unless there is some specific reason to choose to limit the corporation’s existence. The effective date is usually the date of filing, but it can also be some date in the next 90 days.

Once the Articles of Organization have been approved (a process that takes about 3 to 7 business days), the company will receive a certificate from the Secretary of State.

Obtaining a Tax ID Number

In order to open a business bank account (and yes, your business’s account should be separate from your personal accounts), you will need your Certificate from the Secretary of State and a federal employer identification number (EIN). The EIN serves as your company’s tax ID number even if you are not planning to hire any employees right away.

You can apply for an EIN here. If the process is completed online, you will receive your EIN immediately.

Drafting the Corporate Bylaws

At least in Ohio, corporate bylaws and other internal governance documents are not filed with the Secretary of State. However, it is still important to draft a set of bylaws and have them adopted by the corporation’s board of directors. The bylaws summarize how the corporation will be governed. Typically, the bylaws will include information regarding shareholders’ meetings, the board of directors, corporate officers, annual reports, shares of stock, corporate records, etc.

Summary

There are quite a few little details to consider when forming your corporation, especially when drafting the Articles of Incorporation and thinking about the corporate bylaws. Going forward, you will want to make sure the corporation remains in good standing with the Secretary of State, preserves its limited liability and that of the corporate officers and directors, maintains any required business licenses, and addresses tax matters. A good small business attorney and an accountant will be invaluable as you start and grow your business.

The key takeaways are:

• Check your proposed business name with the Secretary of State; 
  
• Keep your Articles of Incorporation simple: 1,500 shares of common stock, no par value (at least until the corporation grows enough to attract outside investors); don’t include any initial stated capital; and don’t worry about adding any optional information; 
• Obtain a tax ID number and open a business bank account; 
• Work with any key corporate officers and directors and your company’s attorney on the corporate bylaws; and 
• Start thinking about next steps, particularly business licensing and tax issues.

Of course, if you have any questions about these or other details as they relate to your business, contact me today for a free consultation.