Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State

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Introduction
This chapter introduces you to the structures, procedures, and legal rules you need to know to form a profit-making corporation and keep it running.

To help you understand where a business corporation fits in the corporate landscape, we begin by briefly describing other types of corporations, including nonprofit, professional, and close corporations. Then we cover the basic legal paperwork and procedures that you must undertake to form and operate a business corporation, including the issuance of shares to your initial shareholders. This background information will help you follow the specific instructions we provide in the later chapters for preparing corporate articles, bylaws, and
minutes, and making your first stock issuance. This chapter also helps you understand the
specific corporate and securities rules contained in your state sheet in Appendix A and any
corporate or securities statutes you may wish to browse in your state's Business Corporation Act tor Securities Act.

Understanding and paying corporate taxes is covered in the next chapter, Chapter 3.Kinds of Corporations
State law classifies and regulates different types of corporations. This book shows you how to form a business corporation (a few states call it a "profit corporation"). Essentially, a business corporation is one that engages in any lawful business that is not specially regulated under state law (such as the insurance, banking, or trust business).

Before discussing the rules that apply to business corporations -- the type most readers of
this book will want to form -- let's look at a few other types of corporations that are set upand operated under special state rules. You must follow unique procedures to form one of these
types of corporations, which are not covered in this book.

Domestic Versus Foreign Corporations

When browsing your state's corporate statutes, you may run into the terms domestic corporation and foreign corporation. A domestic corporation is one that is formed under the laws of your state by filing articles of incorporation with the state's corporate filing office. A corporation that is formed in another state, even though it may be physically present
and doing business in your state, is classified as a foreign corporation in your state's corporation statutes. In this context, foreign means out of state, not out of the country.

Nonprofit Corporations

A nonprofit corporation (in some states called a not-for-profit corporation) is formed under a state's Nonprofit Corporation Act for nonprofit purposes. In other words, its primary purpose
is not to make money for its founders, but to do good work -- for example, to establish child care centers, shelters for the homeless, community health care clinics, museums, hospitals, churches, schools, or performing arts groups. Most nonprofits are formed for purposes recognized as tax-exempt under federal and state income tax laws. This means that the nonprofit doesn't have to pay corporate income tax on its revenues, that it is eligible to receive tax-deductible contributions from the public, and that it qualifies to receive grant funds from
other tax-exempt public and private agencies.

State law as well as federal tax-exemption requirements typically prohibit a nonprofit
corporation from paying out profits to nonprofit members, except in the form of reasonable salaries to those who work for it. When a nonprofit dissolves, the members are normally not allowed to share in a distribution of the nonprofit's assets. Instead, any assets remaining after the nonprofit dissolves must be distributed to another tax-exempt organization. Special types of nonprofits may be recognized under state law that allow people to own, in one fashion or another, corporate assets, so they can receive a portion of these assets when the nonprofit dissolves. For example, a nonprofit homeowners' association or nonprofit trade group may give each member a proprietary interest in the assets of the nonprofit. But these special nonprofits do not enjoy the same benefits as a qualified tax-exempt nonprofit. They may be eligible for an income tax exemption, but they normally do not qualify to receive tax-deductible contributions or public or private grant funds.

Nonprofit corporations, like regular business corporations, have directors who manage the
business of the corporation. The nonprofit corporation can also collect enrollment fees, dues, or similar amounts from members. Like regular corporations, a nonprofit corporation may sue or be sued; pay salaries; provide various types of employee fringe benefits; incur debts and obligations; acquire and hold property; and engage, generally, in any lawful activity not inconsistent with its nonprofit purposes and tax-exempt status. It also provides its directors
and members with limited liability for the debts and liabilities of the corporation and continues perpetually unless steps are taken to dissolve it.

There are key differences between forming and operating a nonprofit and a regular business corporation:

• To form a nonprofit, in most states you must file special nonprofit articles of incorporation. These are normally available for downloading from your state corporate filing office website. (See your state sheet for contact information.)
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• Nonprofit bylaws typically contain provisions similar to those of business corporations. However, nonprofits typically set up a number of special committees to handle nonprofit operations, and nonprofits routinely schedule more frequent meetings of directors than their
  commercial counterparts. Also, nonprofits replace shareholder provisions with member provisions, which specify the rules for membership meetings and the qualifications, responsibilities, and rights of members. Of course, nonprofit bylaws do not contain provisions relating payouts of profits (payment of dividends). The state Nonprofit Corporation Act typically follows or is in close proximity to the state Business Corporation Act in the corporate statutes. So you can usually use the citation to your state's Business Corporation Act to help you locate the Nonprofit Corporation Act. (A few states include nonprofit as well as business corporation statutes in a consolidated General Corporation Act.) See your state sheet in Appendix A for information about locating corporate laws.
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• A critical part of forming and operating a nonprofit is obtaining a federal and state
  income tax exemption and making sure to operate the nonprofit in a way that meets the tax exemption requirements. The requirements for obtaining a state income tax exemption should be posted on your state tax agency website. (See the "State Tax Information" section of your state sheet in Appendix A.)
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For more information about nonprofit corporations. For all the forms and instructions
you need to organize a nonprofit corporation in your state, including step-by-step instructions
on preparing nonprofit articles and bylaws and applying for and obtaining your federal 501(c)(3) nonprofit tax exemption, see How to Form a Nonprofit Corporation, by Anthony Mancuso (Nolo). (California readers should see Nolo's How to Form a Nonprofit Corporation in California, also by Anthony Mancuso.)

Professional Corporations

Most states have special requirements for forming a corporation whose owners will provide state-licensed professional services. The list of particular professions to which these rules apply varies from state to state, but typically lawyers, doctors, other health care professionals, accountants, engineers, and architects must follow these special rules when they incorporate. Other professionals ranging from acupuncturists to massage therapists may also be included.


How to find out whether you must form a professional corporation. If you plan to form a
corporation to render professional services, check your state's corporate filing office website (see your state sheet) to see what professions must incorporate as professional corporations. If this information is not posted, send the office an email asking if your profession must incorporate as a professional corporation. If your profession is not on the state's professional corporation list, you can establish a regular business corporation -- the type this book shows you how to form.