In some cases, forming a corporation is the right tax planning strategy for our clients. As we help facilitate the incorporation of their business, sometimes the importance of complying with corporate law and formalities falls through the cracks. Remember, you are creating a new legal entity, giving birth to a new “being” of sorts. Legal and tax authorities expect full compliance with certain rules before they will recognize your new creation.
Here is a quick, yet important list of rules to follow to ensure that your corporation retains its legal status.
1. Filing Articles of Incorporation
Completing the State’s formal application and filing organization documents is the first step to setting up a separate business entity, also known as a corporation. To some of you, this may be the only step you are aware of, but it’s only the beginning.
2. Obtaining a Federal Employer Identification number (EIN)
Now that you can obtain an EIN online, through the IRS website, this is probably the simplest step in the process. Simple, yet critical to making sure the new entity is recognized for tax purposes by the IRS.
3. Board Meetings
State law usually requires at least one board meeting be convened and documented per year. It may seem odd to hold a board meeting, if you are the only owner of your corporation, yet the requirement remains. It is a good idea to get some outside perspective on your business once in a while anyway, so if you are the only owner, maybe consider appointing a good friend or family member to be on your board of directors. Take them to lunch once a year and ask for their input on your business activities. Document the discussion in a notebook and you’ve had your first board meeting!
4. Appoint Corporate Officers and Directors
First item of business at your first board meeting is to officially appoint company officers and your board of directors. You may be the only officer (Chief Executive Officer, President, etc…) and you may only have one other person be on your board of directors. The quantity is not as important as the formality and documentation.
5. Approve Corporate Bylaws
Bylaws are the legal document that defines a corporation’s purpose, how it runs things, and who does what. The articles of organization contain the basic idea, but the Bylaws take it to the next level of detail. These would be “approved” by the board of directors.
6. Capitalize the Corporation
Putting money into the corporation, and strictly segregating personal funds from corporate funds, is a critical element to the entity maintaining legal status. If the company doesn’t have any money to operate with, it would be difficult to convince the IRS or court that it is fulfilling its purpose.
7. Issue Stock Certificates to Shareholders
You can find stock certificate templates all over the internet. These serve well, as do the ones a lawyer will provide you, to document who owns the stock of the corporation.
8. Keeping Separate Books
As mentioned earlier, keeping corporate funds separate from personal funds is critical to keeping the corporate veil in place. A separate bank account and clean set of accounting records showing the company’s activity, demonstrate the company’s independence from its owners.
By meeting all of these corporate formalities, you can be much more confident that the IRS and court systems will fully recognize your corporation as a separate legal entity, and thus secure all of the tax and legal benefits that you desire.