One of the first things most new business owners do is register their entity with the Secretary of State. While this may seem like a logical first step, I recommend that you register a new entity only after you have considered how much funding you would need and where it would come from. Each type of investor, such as family, friends, an angel, etc. requires a different relationship with the business that is defined by the entity.
When it comes to selecting an appropriate entity for your new business, there are pros and cons associated with each entity. This post looks at 39 considerations when choosing an entity and does a pretty good job of describing the pros and cons of the most common types of entities.
Assuming that you have selected the most appropriate type of entity for your new business, you are now ready to register your entity with the Secretary of State (SOS).
Most states follow the URL convention www.sos.state.NN.us, where NN is the two-letter abbreviation for the state. However, not all states follow this convention but a Google search for “State Name” + “SOS” will usually work to find the URL of your SOS.
The SOS does more than just business registration so you may need to search through a bunch of programs and services to locate where they regulate business functions. Once located, the first step is to verify that the name you chose for the new business is not already taken. Be sure to include the entity designation in the name such as “LLC” or “Inc” in the name.
Remember the primary reason that you register with the SOS is that in the event of a lawsuit or other violation, the plaintive or his legal counsel can simply search the list of business names to locate the Register Agent who will be the person that will be served.
After verifying that the name you want is not already taken, you will be asked to complete an online application process. The questions you will be asked are pretty straightforward such as the address of the business, the person completing the application, and the name and address of the registered agent who can be a founder, local lawyer, or a company like incorp which I personally use for some of my foreign entities.
A foreign entity is an existing business that is registered to do business in a state or jurisdiction other than where it was originally filed. For example, in my case, I have a real estate company in Colorado, where I live. That company has assets in Ohio and Virginia. In Colorado, we have a domestic LLC and in Ohio and Virginia, we have registered as foreign entities. The general rule for needing to register as a foreign entity is if the business has a physical presence, employees, or has a bank account in another state.
If you simply sell products online using the internet and have no office, employees, or bank account in a state where the buyer takes possession, generally you do not need to register as a foreign entity or collect local sales taxes. However, when in doubt it is always a good idea to seek guidance from an attorney specializing in e-commerce.
Two of the most popular entities used for small businesses are Limited Liability Companies and Corporations.
LLC
If you are registering an LLC you will have to make a choice about how decisions will be made.
“Member-Managed” means that every member gets a vote and that all members are active in the decision-making process. A member-managed LLC makes every member a manager and therefore each member can be considered culpable for bad decisions made by the business and therefore subject to being suited as a manager.
“Manager-Managed” means that one or more managers will be the decision-makers and the rest of the members who are considered investors only, and not managers, have liability protection from bad decisions that the business makes since they were not involved in the decision-making process.
When you complete the application and pay your registration fee, the SOS will be issued “Articles of Organization”
Corporation
Corporations are different from partnerships and LLCs in that they issue shares of stock. So, if you are registering a Corporation, either a Sub-Chapter S (S-Corp) or a C-Corp you will be asked about the number of common stock shares the corporation is authorized to issue. This is the number of shares that the corporation can issue.
Some businesses operate in states that have a franchise tax. Colorado, where I live, does not have a franchise tax. In states with a franchise tax, the business will often, initially, list a low number of authorized shares to minimize expenses. A franchise tax is, essentially, a fee that gives a business the privilege to operate in the state, and unlike what the name implies it is not limited to just franchises.
Another decision a corporation will have to make is whether there will be more than one class of stock such as; common stock and preferred stock.
Common Stock has voting rights and the number of shares that an investor owns accords them a greater share in decision-making (since you vote your shares). You, additionally, have claims to the company’s profits based on the number of shares you own.
Preferred Stock, in contrast, generally does not have voting rights but they often have a greater claim on the assets upon liquidations and often receive fixed payments (not based on profits) before common stockholders.
Here is a link to an article that provides more comprehensive descriptions of each type of stock
When you complete the application and pay your fee, you will be issued with “Articles of Incorporation”
If you found this description to be helpful let us know below in the comments. If we missed something be sure to comment on that too so that we can update this post.
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