As a sole proprietor, your liability for business debt is unlimited. Personal
assets such as your home, personal bank accounts, and other valued assets may be
at risk. What does this mean? It means that if your business experiences severe
financial difficulties, creditors can take away your personal property such as
your home, retirement savings, or any other assets you or your spouse own.
If you are operating as a sole proprietor, you will be required to pay
self-employment tax on your profit, currently at 15.3%. If you incorporate your
business, only the salary you pay yourself is subject to self-employment tax.
Depending on your situation, you may be able to save as much as 50% on your tax
bill.
Sole proprietors tend to be more likely to file incorrect returns (many are
self-prepared), and tend to under report revenue or over report deductions. This
means that sole proprietors are significantly more likely to be audited.
Build Credibility with Your Customers - Develop Your
Professional Identity
Distinguishing yourself from the competition by establishing a professional
identity helps increase credibility with your customers. Most businesses choose
to incorporate to prove their legitimacy to both customers and suppliers. Adding
"INC, “CORP”, " or "LLC", “TM”, “R”, “SM” after your business name gives you the
credibility and professionalism that many customers are looking for.
The US recognizes many business forms including corporations, limited liability companies, limited partnerships, sole proprietorships, general partnerships, and other less familiar forms. Each has its own advantages and disadvantages. For any particular venture, personal and business circumstances will dictate the business form of choice. The Department of State cannot offer advice about the choice of business form and strongly recommends consulting with legal and financial advisors before making the decision. Forming a corporation should only be done after careful analysis. This brochure has been developed to answer your questions regarding formation of a business corporation and to assist in the filing of a certificate of incorporation. This brochure contains:
What is a Corporation?
A corporation is a legal entity separate and distinct from the
individual(s) who compose the business. It has rights and abilities similar to
those of a natural person. Principal features are perpetual duration, limited
liability and easy transferability of interests.
How Do I Form a Corporation?
One or more persons, called "incorporators" may form a corporation.
Incorporators are natural persons who are 18 or older. The incorporator(s) signs
the Certificate of Incorporation. The completed Certificate of Incorporation is
filed with the Department of State pursuant to Section 402 of the Business
Corporation Law. Please see Section 102(a)(4) of the Business Corporation Law
for the definition of a corporation.
A form for filing the Certificate of Incorporation is attached. The
form contains only the basic requirements. A Certificate of Incorporation could
include other provisions consistent with law.
What is a Professional Service Corporation?
One or more professionals may form, or cause to be formed, a professional
service corporation (P.C.) for pecuniary profit for the purpose of rendering the
professional service or services that the professionals are authorized to
practice. A P.C. is formed by filing a Certificate of Incorporation pursuant to
Section 1503 of the Business Corporation Law. "Profession," as defined in
Section 1501(b) of the Business Corporation Law, includes the occupations
regulated by Title VIII of the Education Law plus any practice as an attorney
and counselor-at-law, or as a licensed physician.
Are There Any Special Responsibilities Associated With Forming a
Corporation?
The existence of the corporation begins upon the filing of the Certificate
of Incorporation with the Department of State. After the corporate existence has
begun, an organization meeting of the incorporator or incorporators must be held
for the purpose of adopting by-laws, electing directors and transacting any
other business. (See Section 404 of the Business Corporation Law.) The initial
by-laws of a corporation are adopted by its incorporator or incorporators at the
organization meeting. (See Section 601 of the Business Corporation Law.)
The corporation is required to keep correct and complete books and records
of account and must keep minutes of the proceedings of its shareholders, board
of directors and executive committee, if any. The corporation must also keep a
record containing the names and addresses of all shareholders, the number and
class of shares held by each and the dates when they respectively became the
owners of record thereof. (See Section 624 of the Business Corporation Law.)
In addition, a meeting of shareholders must be held annually for the
election of directors and the transaction of other business on a date fixed by
or under the by-laws. (See Section 602 of the Business Corporation Law.)
Please note by-laws and corporate books and records are not filed with the
Department of State or any other state agency. These are internal documents
maintained by the corporation. The Department of State cannot provide legal
advice regarding the preparation of these documents.
Do I Need a Lawyer?
A Certificate of Incorporation has legal effect and enforceable rights and
responsibilities. The Department of State recommends that a lawyer guide the
preparation of these and other legal documents. However, there is no requirement
that a lawyer prepare the documents when forming a corporation.
When I File a Certificate of Incorporation, What Will I Receive
From the Department of State?
The Department of State issues an official filing receipt to the filer of
the Certificate of Incorporation. The filing receipt reflects the date of
filing, the name of the corporation, an extract of information provided in the
Certificate of Incorporation and an accounting of fees paid. Filers should
verify that this information is correct.
The filing receipt is your proof of filing. The Department of State does
not issue duplicate filing receipts to replace those lost or destroyed.
Where Do I Get a Seal and Corporate Kit?
Corporate kits may be purchased from a legal stationery store or any ATAX
office. A corporate kit usually contains a corporate seal, blank stock
certificates and forms for the adoption of by-laws and recording the minutes of
meetings. Rather than composing their own forms, some may find it easier to use
the preprinted forms provided in a corporate kit. Please note that
New York
State law does not require a corporation
to have a seal.
How is a Corporation Taxed?
The New York State Tax Law requires a corporation to file franchise tax
reports and pay franchise taxes annually even if the corporation does not
conduct business or loses money. Franchise tax requirements begin the date the
corporate existence begins. Tax responsibilities continue until the corporation
is legally dissolved by the Secretary of State.
The corporation will need a taxpayer identification number, obtainable
from the federal Internal Revenue Service (http://www.irs.gov/).
The IRS can answer questions about paying or withholding federal income tax,
social security taxes and other federal taxes.
Does a Corporation Need Licenses and Permits?
Some business activities require licenses or permits from state or local
governments, or both. For assistance in identifying whether your business
requires any licenses or permits, contact the Governor’s Office at your State or
the county clerk and the clerk of the city, town or village in which the
business will operate with questions regarding local licenses or permits.
Instructions for Completing the Certificate of Incorporation
A Certificate of Incorporation form has been developed to meet the basic
requirements of the Business Corporation Law. The form does not include any
optional provisions permitted by law. A Certificate of Incorporation may include
other provisions consistent with law. You are not required to use this form. You
may draft your own form or use forms available from legal stationery stores.
The Department of State must make an official record of the completed
Certificate of Incorporation presented for filing. The Department will not
accept papers incompatible with its recording technology. All entries and
signatures should be typewritten or legibly printed in black ink on white paper.
Avoid dark paper, small or light type, outline or condensed fonts, colored inks,
etc.
Paragraph First - Corporation Name
Enter the name of the corporation on the line in the certificate’s title.
Also enter the name of the corporation in Paragraph First
and in the title of the certificate on the last page of the form. The name of
the corporation must be exactly the same in all three places, including spacing
and punctuation.
Choosing the Name of the Corporation
First, Section 301(a)(1) of the Business Corporation Law requires that the
name of the corporation contain one of the following words: Incorporated,
Corporation or Limited, or one of the following abbreviations: Inc., Corp. or
Ltd.
Second, the name of the corporation must be distinguishable from the names
of other corporations, limited liability companies and limited partnerships
already on file with the Department of State.
Third, Section 301 of the Business Corporation Law prohibits or restricts
the use of certain words and phrases in the name of the corporation. Generally,
the name of a corporation may not include a word or phrase restricted by another
statute unless the conditions of the restriction have been complied with. In
addition, certain words and phrases in the name of a corporation require consent
or approval from another agency prior to filing the Certificate of Incorporation
with the Department of State.
Paragraph Second - Purposes
The Certificate of Incorporation form developed by the Department of State
contains an all-purpose clause which is sufficient for filing in most cases and
nothing more needs to be added.
Certain corporate purposes, however, such as the establishment or
maintenance of a hospital or facility providing health related services, and the
establishment or operation of a substance abuse, substance dependence, alcohol
abuse, alcoholism, chemical abuse or dependence program require the consent or
approval of another state agency. In addition, a corporate purpose that promotes
education in any way requires prior consent. A document indicating the consent
or approval of the relevant state agency must be attached to the Certificate of
Incorporation when the certificate is submitted to the Department of State for
filing. Before issuing its consent or approval, the regulatory agency may
require that specific purposes be stated in the Certificate of Incorporation.
Paragraph Third - County Location
Paragraph Third must indicate the
county within State where the office of the corporation will be located. Enter
only the name of a county in the State. Do not include the street address. In
New York City, the borough of
Manhattan is New York
County, the borough of Brooklyn is
Kings County, and the borough
of Staten Island is Richmond
County. Bronx and Queens denote both the borough and the county.
Paragraph Fourth - Stock Structure
Every business corporation must designate in its certificate of
incorporation the number of shares which the corporation shall have the
authority to issue and must state whether the shares are with par value or
without par value. Shares without par value may be issued or sold at any price.
Shares with a stated par value cannot be issued or sold at a price less than the
stated par value.
The form developed by the Department of State contains an authorized stock
structure of 200 shares with no par value. Most corporations are formed with 200
shares no par value. Nothing more needs to be added unless you wish to have a
different stock structure. If this is the case, delete the present statement and
insert the desired number of shares and a statement of their par value or a
statement that they are without par value.
There is a minimum tax of $10 on shares that the corporation is authorized
to issue which must be paid at the time of formation of the corporation. The $10
tax authorizes the corporation to issue a maximum of 200 shares no par value or
a par value of all authorized shares up to $20,000. Corporations wishing to be
authorized to issue more than 200 shares no par value or par value shares
totaling more than $20,000 will incur a tax of more than $10. The tax rate is 5
cents per share of no par value stock and 1/20 of one percent (.05%) of the par
value of the shares that have a stated par value. (Please see Section 180 of the
Tax Law.)
Paragraph Fifth - Designation for Service of Process
The corporation must designate the Secretary of State as its agent for
service of process. Complete Paragraph Fifth by
providing an address within the United States to which the Secretary of State may
mail a copy of any process received. "Process" means the papers that acquire
jurisdiction of the corporation in a legal action. To avoid a default judgment,
the corporation should keep the address for service of process current by filing
its Biennial Statement, or a Certificate of Change or Certificate of Amendment,
as appropriate.
Signing the Certificate of Incorporation
The incorporator or incorporators, if there is more than one, must sign
the Certificate of Incorporation. The incorporator(s) must type or print their
name and address.
Filer
Provide the name and address of the filer of the Certificate of
Incorporation. The Department of State issues the official filing receipt to the
filer of the Certificate of Incorporation.
Filing Fee
The fee for filing the Certificate of Incorporation is varies from State
to State.