Things You Should Think about Before Incorporating

If you’re thinking about starting a business, you probably know that it is a good idea to call a lawyer. What you likely have not considered is that you can save yourself a lot of time and money by preparing before you do that. Sure, you can call an attorney straight away and pay for a crash course to the basis of incorporating a business, or you can read this article, do your research, and efficiently incorporate your company. Not to mention you will probably also seriously impress your lawyer while you save yourself some money. So, here are the 5 things you should think about before incorporating your company.

1. The Name under Which You Want to Incorporate (and a few backups)

You cannot incorporate a business without a name. In the State of New York, every Corporation’s name must end in either Incorporated, Corporation, Limited, Inc., Corp., or Ltd. N.Y. Bus. Corp. L. § 301(a)(1). It is important to come up with a few business name options before going to your attorney.

First, the name you choose cannot be used by another corporation which is already incorporated in your State. Almost, if not, every State has its own online registry which has all of the names under which every single business has been incorporated in that State. In New York, you can search the Department of State’s website here to see if the name you want is taken or not. If you are incorporating you may be tempted to only search corporations, but it would be a good idea to search for other entities including LLCs and partnerships to ensure that you would not be infringing on anyone else’s common law trademark rights.

Second, it is important to have backups because you need to be sure that you will not be infringing on the trademark rights of anyone else when engaging in business under the name which you choose. There is no easy or even 100% certain, guaranteed way to make sure that you are not potentially infringing on anyone else’s trademark rights, but your attorney can conduct trademark searches to reduce the likelihood that you are infringing on anyone else’s rights. While many people ignore these potential issues unless or until such a time that they are seeking to register a trademark, they risk serious lawsuits in the event that they do infringe on another’s trademark and potential ineligibility for registering a trademark for their name. An easy way to get an idea yourself before even go to an attorney is going to Google and looking up the name you’re thinking of using. Online search engines are truly a gift, and we should make use of them as the wonderful resource that they are. Unfortunately, something a corporation incorporates, then raises capital, and is ready to start engaging in business when they decide to get a trademark, but their trademark attorney figures out that their name infringes on someone else’s registered trademark or common law trademark rights.

You may be thinking: “well what if a name is available when we incorporate, but we can’t get a trademark yet because we aren’t using the trade name in commerce? What if it is taken by someone else by the time that we are ready to start using it?” Good news! Your attorney can file an intent-to-use (ITU) application. Make sure to ask about your attorney about an ITU trademark application if you’re interested in obtaining a trademark in the future.

Third, if you are going to start a professional business like a medical business or law practice, then make sure that you are complying with the naming requirements for your profession. For example, attorneys have specific naming requirements dictated by the State Bar and Rules of Professional Conduct for the jurisdictions in which they intend to practice and are licensed.

2. The Initial Director(s) & Officers

It’s important to decide who the director is or directors are, first and foremost. This person or these people are usually those who started the company, since they’re responsible for acting in the best interest of the company, overseeing affairs, and delegating duties. Usually, smaller company have one director, while larger companies have many. This depends on how you want your corporate structure. Here’s a pretty good break down of the different types of directors. It’s good to know when making decisions, about who is and who isn’t a director, the differences between being a director and shareholder.

A director has a more managerial role in the company, while a shareholder is a partial owner. Also, directors are usually paid a salary, while shareholders’ returns are affected by the company’s economic success or lack thereof. Moreover, the power directors have is different than that of shareholders, since the shareholders with voting power elect director to make decisions executively. Shareholders with voting power vote on things like who directors are. Although that makes it appear like shareholders with voting powers have more control over the company, long-term they get to decide who makes day to day decisions regarding the company and determine the financial fate of the company. Note that not ever shareholder has voting power, but that’s something to be determined when you consider who owns how much of which type of share, see 3 and 4.

Each state has its own requirement for which officers are required for a corporation. In New York, the officers are determined by those listed on the Certificate of Incorporation and those provided for in the corporate By-laws. Generally, corporations at least have a President, a Secretary, and a Treasurer. Often times, corporations also appoint at least one Vice President; however, it depends on the size of the entity. Alternatively, some corporations name their officers differently, such as Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Operating Officer (COO), and Secretary.

3. The Types of Shares You Want to Issue

There are many types of shares when it comes to incorporations: common, preferred, different classes (i.e. Class A, Class B, and Class C), and all sorts of combinations thereof. Each is different, and they can affect not only the financial structure of the company but also the governing structure. Here’s the reader’s digest version of each type of share:

• Common Shares: This are the most usual type of share. It’s the least complicated since common shares tend to have the most risk and the best return. This is what people are usually referring to when they use the word “stock,” because common share and stock both mean that the holder owns part of the company. Those who hold common shares usually have the most access to company records, like annual reports.
• Preferred Shares: These aren’t very popular. A preferred share does mean that the shareholder gets a return before common shareholders and preferred shareholders are partial owners as well; however, don’t get voting rights and they have to pay a fixed dividend to the company.

Classes of shares vary, Class A, Class B, and Class C are the primary classes. The different class are indicative of different voting privileges and power within the company. Classes are used most commonly by private companies who go public and don’t want to risk being overpowered. Here’s a description of the different classes of share:

• Class A: these shares usually have some sort of upfront fee attached. With Class A shares you buy the share, then make money off of it through distributions and when you sell it.
• Class B: these shares don’t have many if any upfront fees associated with them, rather fees are paid when the shares are sold. These are good for investors who lack capital up front or are long-term investors. After a specific holding period passes, then Class B shares convert to Class A shares.
• Class C: this class of shares is less common. Generally, they are shares where your investment earns interest income. These do not convert to another class of share.

Then with each type and class of share, there is a consideration of whether the share is voting or non-voting, some examples of types of shares a corporation may issue include: Class A, voting Common Stock, Class B, non-voting Preferred Stock, Class C, non-voting Common Stock. Note that non-voting stocks generally have a reduced price than voting stock. Sometimes, company designate that a particular Class of stock comes with or without voting privileges. Often time, Class A stock is designated voting stock while Class B and Class C stock are designated non-voting stock, or X% of voting rights are designated to Class A while Y% of voting rights are designated to Class B. Generally, most smaller corporations do not need to get too detailed with the type of stock they issue.

4. Who Will Receive Shares, How Many, and at What Price

Deciding what shares and how many of each share each person gets determines how much power that person has in the company, and deciding the price of each share will determine the starting valuation. This decision really varies by the company, and there isn’t much advice one can give other than: think carefully about who should have voting power and how much and who should have ownership in the company and how much.

I would note whatever attorney you hire to incorporate your entity and represent the business will do just that: represent the interests of the corporation. When there are multiple shareholders involved, they should all consider getting their own legal counsel to represent their individual interests and negotiate through matters like this. The attorney who represents the business will have a fiduciary duty to the corporation, meaning that the attorney will act in the best interest of the corporation, so having counsel to represent your personal best interest can be helpful in negotiating and working through such matters.

5. Your Year-end Date

Determining a year-end date in advance is actually more important than you would think. It’ll affect your tax filing and accounting. Also, knowing this going into the incorporation process will save you and your lawyer time. The year-end date is usually either a calendar year or a fiscal year; every situation is different, so give this some thought. These are different, and here’s how:

• Calendar Tax Year: This is the simpler option. It goes from January 1st to December 31st, and it’s most ideal for companies with a sole proprietor. If you own your own business, your life will be much easier if you do all of your taxes at once. This doesn’t preclude larger companies from using this, though. A calendar year can work well for any company of any size which doesn’t have seasonal influxes or special circumstances. It’s also important to know that, per the IRS you must use a calendar year if any of the following are true: “you keep no books or records, you have no annual accounting period, your present tax year does not qualify as a fiscal year, or you are required to use a calendar year by a provision of the Internal Revenue Code or the Income Tax Regulations.”
• Fiscal Tax Year: This one can be better for larger companies or companies with a lot of seasonal influx. A fiscal year technically can be 12 months in a row ending on the last day of a given month, excluding December, or 52-53 weeks in a row ending a day other than the last day of a month. Technically a fiscal year that is 52-53 weeks is called a 52-53-week tax year, but they’re both generally called a fiscal year. Using a fiscal year can be for many different reasons, but most people who choose a fiscal year end go with the end of a quarter: March 31, June 30, September 30, or December 3. Doing this requires some accounting expertise, so you should consult with your accountant or auditor before just deciding. This can be used to align your business’ income and expenses. That’s usually why certain businesses choose this.

It’s probably good to note that there is one more type of year-end date, called a short year, but that isn’t really applicable to those who are filing for incorporation. A short year happens when either your company doesn’t exist for a entire year or there is a change in accounting period.

DISCLAIMER: Please note that this article is for purely educational purposes only and does not constitute legal advice or tax advice.