QUESTION:

I have a small construction business with a few employees. I have just finished the incorporation process in that I have filed my Articles of Incorporation and am told I am now officially a corporation. This sounds too easy. What can I do to ensure that I really do receive all of the benefits I set out to achieve when incorporating?

ANSWER:

You ask a really good question which raises several issues. To start with the most basic and general issue, which is your concern that the process seemed too easy and their must be something more to it, you are correct. While the incorporation process is not rocket science, there are several steps you are going to need to take at this point to ensure the success of your business, and, just as importantly, to ensure that you keep your corporate status.

As a general rule, while incorporation is a great idea for most, but not every, small business, there are certain disadvantages. For one, the incorporation process does cost a certain amount of money, although it does not have to be a prohibitive amount. Various filing fees, as well as money spent for corporate kits, expenditures for learning tools if you are doing it yourself, or, in many cases, attorney's fees, are costs associated with your corporation that you probably would not have if you became or remained a sole proprietorship.

Another big mistake is neglecting business license issues. Often times, people often assume that they do not need to obtain the various licenses for their businesses once they are incorporated, either because they have already done paperwork with the government in forming their corporation, or, often, because the business licenses were properly in place when the business was a sole proprietorship. You need to take the time to determine what licenses are required for your business and obtain them for the corporation. This is especially true for contractors, who must take all necessary steps to ensure that the contractor's license has been obtained for the corporation. Often times, lengthy delays may be involved in the licensing process, but you need to make sure you understand what is involved for your particular business.

Another consideration is simply paperwork. Even if you have an attorney or legal service prepare the necessary documents to incorporate your business, there is a certain amount of paperwork you will need to do to keep your corporate status, and if you are like the vast majority of small businesses, you will not be able to pay an attorney or someone else to do the majority of this paperwork. In fact, a common mistake made by people who have incorporated their business is to simply assume that once you have become a California corporation, that you do not need to do anything else in order to maintain your corporate status.

For instance, you will want to hold annual meetings of the shareholders and directors of your corporation, and keep detailed minutes of all such meetings. Special meetings may also need to be called and recorded. You also need to draft bylaws for your corporation and adopt them formally by resolution. Failure to act as a corporation may allow piercing of the corporate veil, which in the end could end up in your business losing its status as a corporation, from a tax standpoint, as well as from an asset protection standpoint.

Other mistakes you will want to avoid include failing to use the corporate name while doing business and failing to keep your personal funds separate from the funds of the corporation. To this end, you should ensure that you use the corporate name on stationary, business cards, announcements, professional listings, contracts of any kind, and all other documents. You should also deposit all funds in your corporate bank account, not your individual account, and make sure all incoming checks for the business are payable to the corporation. All payments from the corporation should be designated as such, preferably from the corporate checking account.

You also are going to want to make sure that the corporate accounting is kept up to date. For this reason, and the fact that it could save you quite a bit of money in taxes, you should seriously consider at least consulting with a certified public accountant or other tax advisor regarding the tax aspects of your corporation. You must also keep up with the various tax paperwork involved for the corporation, and having a professional to help you with this can be a big help.

You will also want to ensure that you issue stock to whomever the shareholders in the corporation will be, and you should do this at the outset. Further, certain paperwork in connection with your stock transactions will probably need to be forwarded to the appropriate government entities, and you should seek the assistance of a professional for help in this regard whenever possible.

In the end, unfortunately, it is all too common for business persons, when they get tied up with busy schedules, their families, and the day-to-day headaches of taking care of the operation of the business, to neglect the necessary paperwork needed to ensure that, in the event the business is sued or audited, that the corporate status is upheld and respected. The above are some examples of the common, but definitely not all of, the mistakes bussiness persons make in this regard. If you simply do the minimum to obtain a California Corporation number, obtain a corporate kit, and put the kit on a shelf somewhere and hope for the best, you are inviting trouble.

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