Reacting Forward: Process of Incorporation

Happy Day! 🥳

1966: “Remote shopping, while entirely feasible, will flop.” — Time Magazine.

The process is simple. There are a few fun decisions you must make. The first is coming up with a suitable company name for your idea. The second is to elect the corporation type. The rest of the process is a matter of a few mouse clicks, and you never have to think about it again. What could be simpler? Oh and it costs less than the price of lunch for two.

Choosing a Company Name

As part of the incorporation process, the online service you select for the paperwork will instantaneously run a search to ensure your chosen name is unique in your State, and you can decide whether you want to register the name.

Many people drive themselves crazy trying to come up with a catchy name for their company. There is also an army of experts willing to relieve you of your life savings to help you come up with it. When you think about it, however, the name of a company rarely convinces a customer to purchase a product or service. It is the successful product or service that usually makes the company a household name, and achieves the critical repeat business. If you experience a lousy product or poor service, the chances of you going back for more are negligible, irrespective of the company name.

Do you use post-it pads because the manufacturer is called 3M? 3M has created an image of innovation and quality. Their logo is instantly recognizable despite the fact the actual company name (Minnesota Mining and Manufacturing) has little to do with their current business concept or your sticky notes. Do you drink Starbucks coffee because the name inspires you?

I suggest that rather than getting stressed about a catchy company name, you instead put your energy into creating a great idea, and then providing a product or service second to none.

A good company name is perhaps more important if your business is providing a service. The name should at least reflect what you do so that it is easy for potential customers to recall it whenever they need that service.

For instance, who can deny Paypal describes itself perfectly? You might be surprised to learn, however, that it did not start out as Paypal. In 1998 Peter Thiel and Max Levchin founded Field Link, which was soon renamed Confinity. A year later Confinity launched the first version of the PayPal electronic payments system. Confinity was acquired by X.com Corporation and for their initial offering of stock on NASDAQ the firm was renamed PayPal Inc.

In 2002 eBay Inc. acquired PayPal for $1.5 billion in stock. A four-year American dream if ever there was one. Interestingly, Ebay was originally called Auctionweb. Having weak original names did not stop either company from succeeding. In 2018 Paypal is an independent entity again.

It does not cost anything to change a company name later, and you do not have to go through another incorporation process. If the name changes, you simply update the information online. The Secretary of State website will record it as Company X, D/B/A (doing business as) Company Y. When I first incorporated an idea I went with the uninspiring name TGB International (TGB being my initials and “international” because there is a magic in thinking big). Then when I started my first company I changed the name from TGB International to QOL Medical. QOL is an acronym for quality of life, which better reflected the purpose of the company, and we became probably the smallest international company in the pharmaceutical business with customers in Europe and Asia.

For my own companies I spent zero dollars and less than five minutes coming up with the names. When I die I doubt anyone will remember them, but the companies made a positive difference in people’s lives with excellent products and equally sophisticated customer service. That is what matters.

Here are some basic tips, but don’t sweat it as there are as many exceptions to the rules. Companies with great names like Circuit City fail just as much as ones with nonsense names like Flooz.com, and who can say that Amazon.com Inc. makes any sense as a company name, but it has hardly mattered to their success. I have heard management consultants wax lyrical about the brilliance of the Amazon.com Inc. name, but actually Bezos came up with it on the fly. He wanted a name that was at the head of the alphabet so it would show up first on list services.

Make it somewhat relevant to your product or service.

Trust your instincts. If it feels right to you, go with it.

If your instincts are not strong at the moment, take a plain piece of paper and just start scrawling out words and names. Eventually, something on the paper pops out at you as if it is written in bold or colors. Go with it.

If your company provides a service, create a name that starts with the letter A, as it increases your chances of being spotted first in any advertising list. Whether on paper or online listings, few people go beyond the first page, so being early in the alphabet sometimes helps.

Do not waste time and resources, especially cash, by hiring someone to do this for you.

Choosing a Corporate Structure

Here is all you will ever need to know about corporate structures along with some recommendations from me. If you prefer to skip this information, go to the next section entitled The Process.

1. General Corporation: Keeping in mind that more than 90 percent of small businesses are not incorporated, a general corporation, also known as a C corporation is the most popular corporate structure in America. This structure allows as many shareholders as you want and is more typical of large public companies. You, however, are not starting out as a corporation but a non-employer start-up. This is not for you yet.

The problem with the C Corporation is double taxation, first at federal level and then at state level. After that you will get taxed on any profit distributions both at federal and state levels.

If, like most people, you are planning a small business, owned by yourself or perhaps with just one or two partners, then you should avoid this structure.

2. Close Corporation: Shareholders are limited in number to 30. Not all states recognize close corporations, so most virtual businesses will choose an alternative structure.

3. Subchapter S Corporation: A Subchapter S company is a general corporation that has a special tax status with the IRS that permits business owners and entrepreneurs to be taxed as if they were still sole proprietors.

S Corporations avoid the double taxation of a general corporation but there are some restrictions to ownership. Only citizens or permanent residents of the United States can be involved and the shareholder limit is set at 75. Other restrictions make it a complicated structure for a virtual business. S Corporations add a complexity to your small business that is distracting, especially if you intend to be the sole owner at first.

4. Limited Liability Company (LLC): This is not strictly a corporation, but many small business owners and entrepreneurs prefer LLC because they get the limited liability protection of a corporation with the “pass through” taxation of a sole proprietorship. Every state recognizes the structure and there is greater flexibility in how they can be organized and managed.

They are so simple and inexpensive to set up. All my companies have been LLCs, a structure unique to the USA. (SE company in Europe) (Individually owned company in China)

The Process

It is a simple online Q&A exercise, and you don’t have to leave your desk. In fact, if you have access to the Internet while you are reading this, you can have it taken care of in about ten minutes. Every year thereafter you will receive a registration renewal offer in the mail, and that is pretty much about it as far as the worry factor going forward goes.

If you are planning to raise funds through loans or other means, or establish a line of credit, the lender will ask to see the paperwork that comes out of this process, so file it where you can find it.

It is not necessary to understand the paperwork, but for completeness I will describe it here. All new LLCs must file so-called articles of organization with their secretary of state’s office. That sounds intimidating, but it is just a short form you fill out online that asks for the names of the LLC and its members, and their contact information, and it is part of the same online process. As a nonemployer you would also be the member.

The filing fee can range from $30 to $200, and the calculation is done online for you. A few states also have other registration requirements.

Operating Agreement

Although often not required by law, you will be offered the chance to draft an operating agreement for your LLC that spells out the details of the business arrangement, including members (you and any other shareholders) percentage ownership, roles, rights, and responsibilities. The online service does the work for you and you just need to fill in names and mailing addresses. Having such an agreement can help protect the LLC structure if it’s challenged in court and prevents you from having to default to state operating rules. Because you are likely the sole owner, it seems an unnecessarily complex step, but laws are laws, so just point and click away. Yes, even this seemingly complicated task is handled in the same point and click session online. If you intend to seek a loan for external sources, the lender will typically want to have an operating agreement for your company on file.

Registered Agent

You are required to have a registered agent in the state of incorporation. It sounds complicated, but a registered agent is simply someone who is available during normal business hours to receive legal and tax mail if there are any. Most non-employer entrepreneurs would select themselves as the registered agent, which avoids all cost. Paying for a registered agent at the start is a bit dumb. Be aware that some online services offer to be your registered agent. Don’t fall for it.

The online process can make this role seem so mystical that you will readily part with $100 a year to have a third-party be your registered agent. Why throw that money away when you can designate yourself at your own company’s agent? After all you are likely to live where the paperwork is being sent.

So long as you have a physical address in the state of incorporation, you can make yourself the agent. When the question comes up online, enter your own name and address. Then once a year the license renewal paperwork arrives at your home address with instructions about how to renew online and you never have to remember.

You will also receive occasional letters about employee taxes, worker’s compensation and the like. The non-employer business model, however, has no employees, so these bulletins go to the trashcan. What could be simpler?

In reality, all you have as a result of the process is some paperwork. Mentally, however, you have taken a giant leap in commitment. What you have been procrastinating over, or daydreaming about for weeks, months or years, is finally here. You are a business owner. You are your own boss. Doesn’t that feel exciting? Whenever the paperwork arrives in the mail, my stomach churns with a child’s anticipation of Christmas. There is no way to predict what will become of my company, and that is what is so exhilarating to me.

Formally structuring your business does one other major thing for you—it portrays the appropriately professional company image. It allows you to call yourself a Chief Executive Officer of a real business and that’s an ego boost for anyone.

Additional Resources: