Articles of Incorporation: What New Business Owners Should Know

What are articles of incorporation?

Articles of incorporation, sometimes called a certification of formation or a charter, are a set of documents filed with a government body to legally document a corporation’s creation. These legal documents contain general information about the corporation, including the business name and business location.

Articles of incorporation are easy to confuse with bylaws, which lay out the rules and regulations governing a corporation and help establish the roles and duties of the company’s directors and officers. Bylaws work in conjunction with the articles of incorporation to form the business’s legal backbone. 

Why are articles of incorporation important?

Articles of incorporation are crucial because they establish a company within its home state, informing the state of essential aspects of the business. When filing, the business owner lets the state know the following:

• The corporation’s purpose
• Name and address of the registered agent
• Number of authorized shares and amounts of common stock
• Names of any incorporators

Some states also request a copy of the company bylaws. The bylaws help keep a corporation running smoothly by outlining the rights and responsibilities of the shareholders and board of directors.

As a business owner, you can benefit from articles of incorporation in two main ways:

• Protection from debt: By making your business a legal corporation, business owners protect themselves from the company’s debts.
• Ability to sell stock: After incorporation, you can raise capital quickly through the sale of stock. You can outline how you’ll sell stock to raise capital in your company’s business plan.

What is in the articles of incorporation?

Articles of incorporation include the following information, with some variations by state:

• The name of your business or corporation
• The name and address of your corporation’s registered agent (the person or company to whom the state government will direct all vital legal and state documents and communications)
• The type of corporate legal structure, which may include a designation of your business as a nonprofit corporation, nonstock corporation or other category
• The names and addresses of all members of your company’s board of directors
• The type and amount of authorized shares available to your company (“authorized shares” means the maximum number of shares that your corporation may issue and may include common stock and preferred stock)
• The duration of the business (if it’s not permanent)
• Your name, signature and address; if you are not the business’s incorporator, you will provide this information for the incorporator instead 

Some companies may wish to amend their articles of incorporation after their business status is established. You can do this with a restatement, also known as restated articles of incorporation. 

How do articles of incorporation differ for a foreign corporation?

Articles of incorporation are intended for American corporations. A foreign corporation operating in the United States must instead file a certificate of registration. This legal document also varies in content and application process by state.

Are articles of incorporation the same as articles of organization?

Articles of incorporation and articles of organization are similar filings, with one primary difference: Articles of incorporation are for companies looking to form a corporation, while articles of organization are for limited liability companies (LLCs) ― an entirely different business classification under the Internal Revenue Code. 

Establishing a business as an LLC provides legal and financial protections to the business owner. LLCs usually are preferred to corporations for companies that plan to have real estate holdings or other assets that change in value.

Like corporations, LLCs provide tax and liability benefits according to the stipulations of the Internal Revenue Code. Unlike corporations, LLCs cannot transfer holdings easily and aren’t a good choice for those looking to have outside investors. 

Before filing either legal document, you should review your state’s rules and regulations. In some states, the terms “articles of incorporation” and “articles of organization” are used interchangeably.

Are articles of incorporation the same as an LLC operating agreement?

If you’re planning to register your company as an LLC, you’ll need articles of organization alongside an LLC operating agreement. The latter is a legally binding document that clearly defines the LLC’s structure, management, operations and finances. It states each LLC member’s roles, responsibilities, relationships and rights. It also lists each member’s ownership percentage and share of profits and losses.

LLC operating agreements can clear up confusion when allocating profits and losses or distributing ownership shares. Formal guidelines in your operating agreement can help you avoid the conflicts that often come with trying to sort out these matters verbally in real time.

What does an LLC operating agreement include?

You should include the following information in your company’s LLC operating agreement (your state may require additional information):

• Percentages of each LLC member’s ownership 
• Each LLC member’s voting rights and responsibilities
• Each LLC member’s duties and powers
• Rules for holding board meetings
• Capital contributions of all LLC members 
• Protocol for distributing the LLC’s profits and losses among members
• Protocol for transferring interest in the company, such as buy-sell provisions, buyout provisions and ownership transfers upon an LLC member’s death
• LLC dissolution protocol

How to create an LLC operating agreement

With an attorney’s help, you should build an LLC operating agreement with the following sections as your backbone.

1. Organization: Here, you’ll write your LLC’s official name and address. You’ll also detail the LLC’s purpose, business type and member ownership percentages.
2. Capital contribution: Detail which LLC members contributed initial capital and how you’ll raise additional money.
3. Management and voting: Describe your management structure and set up your members’ voting rights and procedures.
4. Distributions: Explain how you’ll distribute your LLC’s profits and losses among your members.
5. Membership changes: Show how you’ll add and remove LLC members. Detail the transfer process for membership interest alongside your company’s buyout and buy-sell provisions.
6. Dissolution: Write out the steps involved in dissolving your company. 

What are the benefits of an LLC?

• Personal asset protection: Your personal assets are protected if your company is sued. The only exception would be if you’ve committed fraud or a criminal act as an LLC member.
• Pass-through taxation: LLC earnings are recorded as members’ personal income rather than business income. That means you can avoid double taxation (taxes on both business and personal income).
• Simplicity: LLCs require less paperwork and fewer formalities, such as regular board meetings, than corporations.
• Flexibility: LLCs are mostly free to set up their ownership, taxation and management structures however they please. That means your company can be a single- or multimember LLC, a member-managed LLC or a manager-managed LLC.
• Credibility: Registering as an LLC adds an air of professionalism to your company. LLCs are widely recognized as a sign of serious business and that alone can help you bring in new customers and clients.
• Flexible profit distribution: LLCs can decide how to distribute profits to the owners. These distributions don’t have to reflect ownership percentages or be equal for each LLC member.
• Access to business loans: LLCs can build credit histories, so once you start your LLC, you can qualify gradually for small business loans to help your company grow.

What to do after starting an LLC

• Register for taxes: You must register your LLC for state taxes. If you sell products, you must also register for sales tax. If you hire employees, you must register for payroll taxes and unemployment insurance.
• Hire an accountant: Although finding a small business accountant for your LLC can be tricky, it’s not nearly as challenging as doing your own LLC taxes. Finding the right person or firm is among the most critical early steps of launching your LLC.
• Register for business permits: Your LLC likely requires additional permits besides articles of incorporation. Your industry may determine these requirements ― for example, selling alcohol requires additional permits. Your branding may also require additional permits if you want to register a doing-business-as name.
• Obtain business insurance: There are several dozen types of business insurance your LLC may need. Take the time to learn about each and sign up for any policies that work for your budget and circumstances.
• Adhere to labor laws: Your LLC must follow several labor laws pertaining to employee citizenship, wages, workers’ compensation and more. You may want to consult an attorney as you get started to ensure you’re compliant.

What is an S corporation (S-corp) and must it file articles of incorporation?

Yes, an S-corp must file articles of incorporation. That said, an S-corp differs substantially from a C corporation (C-corp), which more closely resembles the traditional idea of a corporation. Learn more below.

What is an S-corp?

An S-corp combines a C-corp’s limited liability with the tax advantages you would get as a partnership or LLC. The primary tax advantage in question here is pass-through taxation ― namely, S-corp income is taxed as personal income. That means your corporate profits and losses appear on your and your shareholders’ personal tax returns.

This arrangement was highly advantageous for the many decades during which federal personal income tax rates were lower than their corporate counterparts. However, the Tax Cuts and Jobs Act has lowered corporate tax rates enough to negate this benefit somewhat. That said, S-corp taxation structures still avoid the double taxation of paying taxes on corporate income and then again on personal income.

What are the benefits of an S-corp?

• Potentially lower taxes: S-corp owners can avoid double taxation and thus keep more of their revenue.
• Liability protection: As with C-corps, S-corps grant their owners liability protection. That means lawsuits against your business won’t affect your personal assets. The same isn’t true for sole proprietorships or partnerships.
• Easy business structure changes: An S-corp is among the easiest business structures from which to change to another structure. Other transitions can come with unfavorable tax consequences.
• Salary and dividend payments: S-corp structures enable shareholders to receive both a salary and dividends from the company. You’ll pay lower taxes on dividends and you can deduct the wages you’ve paid when calculating taxes on the money you’ve paid shareholders.

How do you start an S-corp?

To start an S-corp, you’ll file articles of incorporation per the instructions in this guide. You’ll also file IRS Form 2553 to receive S-corp status at the federal level. That’s important because articles of incorporation are effective at the state level only, whereas business entity types exist at the federal level.

What is a B corporation (B-corp)?

Unlike other corporation types, B-corps are not official tax or government structures. Instead, a B-corp is a certificate your business can earn while being an S-corp, an LLC or another type of business. It signifies that your company meets certain rigorous social standards that the nonprofit B Lab has set. These are the “highest standards of verified social and environmental performance, public transparency and legal accountability to balance profit and purpose.”

You might want to obtain B-corp status since 85 percent of consumers have attempted to live more sustainable lifestyles in recent years. If your company obtains B-corp status, consumers would know that your products can empower their sustainable lifestyles.

How to start a B-corp

To gain B-corp status, you must ensure that your state acknowledges this classification. If not, you can consider incorporating in a nearby state. You must then apply for a thorough audit through B Lab, which will survey factors, such as how you treat your employees, environment and community. If you score high enough, you’ll become a B-corp and you should expect random audits in the future.

After qualifying, you must share your scores on the B-corp website and legally commit to prioritizing your stakeholders. But before any of this, you’ll need to have incorporated your business.

When can I use articles of incorporation?

Articles of incorporation separate the business owner from the business by creating a separate legal entity for the business. Incorporating reduces a business owner’s personal risk because the business becomes financially responsible for its debts and legally responsible in the case of lawsuits.

Any business type can file articles of incorporation. A new business may launch as a corporation or a business structured as a sole proprietorship can later become a corporation. Smaller businesses typically become S-corps and pay taxes only on dividends, while large businesses often become C-corps, which pay corporate taxes and must have a board of directors to operate.

How do I fill out the forms?

The first step is to structure the business as a corporation. The specific documents vary by state, but each includes several questions about the business and its owners. The forms are easily found online but don’t be alarmed if they are called something other than articles of incorporation.

Despite variations by state, the forms all ask similar questions and use a fill-in-the-blank format. The crucial information includes the following:

• The business or corporation name
• The recipient of all legal notices and official mailings
• The purpose and duration of the business
• The incorporator
• The directors
• How many authorized shares of stock can be issued
• How many classes of stock the corporation will be allowed to issue

Where do I submit the forms and how much is the filing fee?

Once you’ve filled out the proper documents, you can submit them by mail, in person at the secretary of state’s office or electronically on the secretary of state’s website, depending on your state. 

The filing fee also varies by state but, generally, it runs between $50 and $300. Other charges may apply at the time of the filing, again depending on the state.

After you’ve filled out all of the forms and paid all fees, the secretary of state’s office will review the forms to ensure the name isn’t already in use and that all other information meets the state’s requirements. If everything is correct, the state files the forms, making the business a legal corporation. 

Where do I find the forms?

Every state is different, so here are links to each state’s form. You can fill them in online or print them out, complete them and send them to the secretary of state’s office. 

Incorporating your business makes it real

It can be easy to eschew bureaucracy when all you want to do is get your new business off the ground but filing the right paperwork with the proper agencies is important to establishing and protecting your company. Articles of incorporation are one of the first documents you need to fill out to make your new business “real” in the eyes of the law. With the guidance above, you can choose the right corporate structure for your business and easily find the documents you need to be fully compliant in your state.

Tejas Vemparala and Chad Brooks contributed to this article.