The process of incorporating can come with a lot of new questions, especially if you’ve never done this before. One of them is corporation vs. incorporation, and how they differ, as well as the difference between Inc. and Corp. We’re always happy to share our knowledge to help people when it comes to incorporating. Here are a few of the most common questions:
Q: What is the difference between a corporation and incorporation?
A: A “corporation” is the business entity itself. “Incorporation” is the act of starting a corporate business entity.
A corporation (Inc.), a limited partnership (LP), and a non-profit (non-stock) corporation are incorporated entities. This means they have filed their corporate charter, the founding document, with the state of incorporation. They have tiers of ownership and management that are defined by statute. Corporations file annual reports with the state of incorporation.
Limited liability companies (LLCs) and Series LLCs are examples of unincorporated entities. The contract between owners and managers, called the Operating Agreement, governs these types of entities. LLCs offer a higher degree of freedom in regard to management and how the owners choose to have the company taxed.
Q: What does it mean when a company is incorporated?
A: Incorporation means the company has become a legal entity.
Businesses incorporate to separate the assets and liabilities of their business from that of their owners. When a business is incorporated, that means it has filed the necessary paperwork with the state division of corporations to become a corporation.
Q: OK, what’s the difference between inc vs. corp?
A: It’s the same thing.
Inc. and corp. are different suffixes you can choose when naming your corporation. Inc. is the most common, but ultimately it is up to you.
Q: How do I form an LLC?
A: Contact a registered agent.
Forming an LLC is a fairly simple process. Once you have chosen a name for your company that ends in LLC, L.L.C. or Limited Liability Company, contact a registered agent like IncNow. You only have to fill out a simple online form to start the process. The registered agent will file the necessary paperwork to form your LLC and forward correspondence from the state for an ongoing fee. The registered agent will forward you the company’s Certificate of Formation once the state approves and files it.
Q: Do I need to incorporate twice?
A: No. You only incorporate once. You just go on-record elsewhere you do business.
Many people incorporate in one state and have their principle place of business in another state. All 49 other states must accept for example a Delaware LLC and let it do business. However, they may also require it to go on-record in their state. Many shop around for the best state in which to incorporate and come to Delaware. The advantage of this is that the state of incorporation’s laws will govern the internal affairs of the company (over less business-friendly laws in the state where you happen to be living/working).
After incorporating in Delaware, you should determine whether you also need to file for a Certificate of Authority in the state of your principle place of business. This is known as “qualification” to register this “foreign” company. “Foreign” is a term meaning “out-of-state” not “international”. This is done in the state of the principle place of business and any other states where the company has an office. Every state has different laws regarding the level of activity needed before it requires qualification.
Q: Can a company incorporate in multiple states?
A: No, you should only incorporate in one state.
Some business owners confuse foreign qualification with forming an entity in each state they do business. While business often do form multiple entities if they have subsidiaries, it is not advisable to form separate entities for one business. It creates issues with choice of law, which entity holds the companies assets, and uncertainty if there are discrepancies between each entities governing documents. It also would create unnecessary filing and maintenance costs for the business.
Take advantage of the freedom of being able to choose the laws of the state that govern your internal business structure. Forming a redundant entity in your home state or in each state you do business is not a well-advised strategy.
Q: How many people do you need to incorporate?
A: At least one.
The simple answer is at least one. The individual who owns a company is referred to as the Legal Party. In a corporation this individual is called a shareholder or stockholder. In an LLC this individual is considered a member. The legal party who starts a company can act as the sole director, officer, and shareholder of a corporation, or, the sole member of an LLC. When there is only one member in an LLC this creates a single-member LLC, known as a Disregarded Entity for tax purposes or a “DRE”. For purposes of starting your company, you only need yourself.
Q: How much does it cost to incorporate?
A: The fee will vary based on what state you choose to incorporate in.
Every state has their own fee schedule when it comes to doing business in their particular jurisdiction. The fee will also vary based on whether you are starting an LLC or a Corporation and how quickly you would like to establish your new company. In Delaware, for example, the Certificate you file to create a corporation has a nominal fee of $89 and the LLC has a nominal fee of $90.
Q: Why do they say “foreign” when I am still in the United States? What’s my principal place of business?
A: It’s just a word. As for the Principal Place of Business (“PPB” for short), there is a test for that.
The state where you incorporate is called the “domestic” state and the other 49 states are called “foreign” states. You should not make the mistake of “re-incorporating” in the other states by filing another certificate of formation or articles of organization. That would result in having multiple companies by the same name and be a big mistake. Instead you go “on-record” as for example a Delaware LLC doing business in Louisiana. Where is your principal place of business? In this example, Louisiana would be known as the “foreign” state where you have offices that do everything, so it is easy.
Other times, businesses have multiple locations. In those instances, one must look at where the executives make decisions (the “nerve center”) and where the activities are conducted (the “muscle center”) to determine where is your principal place of business. The overall balancing of this two-prong approach is the “total activities test”. Every company has one principal place of business. Generally, you need to go on record there. This is so if there is a problem, the injured or aggrieved parties know where to serve you with official papers. This is a matter of public policy and you should comply with this state law requirement and evaluate where you should go on record with a certificate of authority.
We cannot tell you whether your home state requires you to go on record. That is a legal opinion. IncNow is a filing service, not a law firm. You may want to contact legal counsel in your home state or make the decision for yourself after reviewing the laws in your home state. To avoid this trouble, you can play it safe and just go on record. If you are wondering what the penalty is for not going on record, that too is a matter of state law. We have heard some states, like New York, only charge a $50 fine plus require you pay the costs to qualify. Other states may have different rules which are not as forgiving.
Q: What is the legal theory behind this requirement?
A: It’s all about official, physical presence.
What is the purpose of this? Is this just another way for your home state to make money? It’s more a matter of official records where the public can find your business. In law school, there is a class known as Civil Procedure. In that class, one learns that a company is subject to “general jurisdiction” in both the state of incorporation and in the principal place of business. Therefore the courts of those two states have jurisdiction over your business over anything under the sun, no matter where the controversy arose, if the plaintiff chooses to file in those states.
In other states usually you are only subject to “specific jurisdiction” over the activities which were conducted in those states. This prevents “forum shopping” to the most plaintiff friendly states. In order to let people know how to get in touch with you in the states where you have general jurisdiction, you must have a physical presence on public record in both states. This could be your headquarters office, or it could be a registered agent’s office (like Agents and Corporations, Inc.) This filing allows people to look-up your company name with the secretary of state and locate an address where to serve your company legal papers within the boundaries of the state.
Q: Let’s cut to the chase, do I need to qualify? Please help.
A: We look forward to assisting you.
How do you know if you need to register in the state of your principle place of business? Most states define the terms “doing business” as having a “brick and mortar” location there, employees, holding and or shipping products or inventory, holding specific licensing to that state or holding real property. In some states, banks may also request the qualification in order to open the bank account for the company in the state of the principle place of business. Sometimes micro-businesses that are one person activities are no required to file the certificate of authority. Also sometimes you need to qualify in other states in which you are conducting business.
Each state has its own laws on whether your company’s level of activity is great enough to have to go on record. Generally you do not need to qualify if the only contacts with other states is selling products, advertising, hiring sub-contractors as sales-people or selling services, provided you do not have an office or employees in that state.
Q: What are the mechanics?
A: We can help and make it easy.
The process of qualification in most states will require a short application, a fee, plus either a Good Standing Certificate or Certified Copy of the formation certificate. The forms vary from state to state as far as the required information. Agents and Corporations, Inc. offers the service of qualification for all 50 states. Your registration is handled by professionals who have the experience to gain approval in a timely fashion without guess work. At your request, we will quote you our processing fee, the state fee and cost of the required documents. You need to name an agent with a street address in the state of qualification. The certificate of authority is the document obtained once the process is completed and approved.
For many; incorporation is the first step and qualification is the next step toward finalizing their business filing. Agents and Corporations, Inc., is happy to provide professional services to accommodate these and other business necessities.
You can take the LLC out of Delaware, but you cannot take the Delaware out of the LLC.
*(unless there is a merger or a conversion, but we’ll save that for another post.)