Overview of Corporate Requirements

Before we begin the forms, here is basic information about how corporations work, corporate restrictions and taxes.

Who and what makes up a corporation

Shareholders: Owners of the corporation. They elect the Board of Directors. Corporations can be owned by one person.

Board of Directors: In charge of corporate policy. All major corporate decisions should be approved by the Board of Directors.

Officers: People charged with important management functions (president, vice-president, chief financial officer, etc.) Usually the senior officers are members of the Board of Directors.

Employees: Anyone who works in the day-to-day operations of the corporation, under the control or supervision of the officers or the Board. Note: Officers must be treated as employees and are not independent contractors. See "Are you an Employer".

Articles of Incorporation: The corporation's charter, which is filed with your state's Secretary of State. For simple corporations (which are the only type of corporation discussed), the Articles of Incorporation basically say that the corporation is in business, has authorized a certain number of shares, and that the directors are indemnified (protected from lawsuits) to the extent allowed by law.

Bylaws: Legally required operating guidelines for the shareholders and the Board of Directors.

Minutes: Records of any decisions made by the Board of Directors or the shareholders.

Things to remember about corporations

Corporations have some good traits:

Limited legal liability:

Creditors usually only have a claim on the corporation's assets - not the shareholders' personal assets. However, at times officers and shareholders can be held personally liable for their own wrongful acts and for unpaid taxes (such as employer taxes). In general, shareholders cannot be held personally liable for the actions of employees.

Warning: Limited legal liability is not guaranteed. The Corporations Code, the courts and the IRS require that certain formalities be observed in operating your business as a corporation if you are to protect the directors and shareholders from personal liability. These formalities are explained below.

Corporations have these restrictions:

Corporate formalities: All corporations must continually comply with corporate formalities or they will have wasted all their time in incorporating, because creditors and tax agencies might be able to "pierce" the corporate veil. If this happens, the shareholders will owe all sums due and taxes may be completely recalculated as if the corporation didn't exist. All corporations must follow these formalities:

  • Keep finances completely separate from shareholder finances;
  • Have annual shareholder meetings with written minutes;
  • Have regular Board of Directors meetings with written minutes;
  • Obtain approval from the Board of Directors for all major decisions;
  • Conduct all business and sign documents in the corporation's name.

If you ever think "I'm too busy to have a corporate meeting and keep minutes," think of one of your delivery trucks slamming into a sidewalk full of people. Suddenly, limited liability looks very good to your shareholders, and complying with these requirements isn't a waste of time at all!

Handling money: the corporation's assets must be kept separate from shareholders' personal assets. This applies even if you are the sole shareholder. To get money from your corporation to you, you must write a check for a salary, pay yourself dividends, or in certain cases, obtain a loan from the corporation. All these have legal and tax complications.

  • A salary must have employee taxes deducted and the corporation must pay additional employer taxes.
  • If your corporation pays dividends, it must pay ALL shareholders in proportion to their number of shares.
  • If shareholders take a loan from the corporation, an attorney should be consulted to provide the proper loan documents and to insure that the corporation's legal status is not invalidated.

Getting your money into the corporation is also complicated. You must purchase shares of stock or you can loan the corporation money. The loan must be documented and the corporation must pay you interest.

Credit Guarantees: Because corporations have limited liability, companies are reluctant to grant credit to new corporations. They often ask that a primary shareholder "guarantee" payment. This means that if the corporation's assets cannot repay the debt, the shareholder agrees to use his personal assets to repay it (eliminating the major benefit from incorporation).

Double Taxation: A corporation's net income is taxed twice. First taxes are paid on net income (before dividends are paid). The corporation uses its after-tax profits to pay shareholders dividends. Shareholders must then pay taxes on this dividend income. thus, the same profits are taxed twice.

2 kinds of corporations

To ease the double taxation burden for busineses, the government has set up a special type of corporation, called an S-corporation. If the shareholders elect to be an S-corporation, all the corporation's net income or losses are passed through to its shareholders without being federally taxed. Shareholders then pay taxes on their portion of net income. Regular corporations (called C-corporations) must pay taxes on their net income before paying it to shareholders; then shareholders pay taxes on it again after it is distributed as dividends.

With IRS form 2553 your corporation can file for S-corporation status and avoid double taxation.

Benefits of S versus C-corporation status

It is not always beneficial to elect S-corporation status. Here are some basic differences:

S-Corps C-Corps
Business use of home deduction allowed Yes No
Owners can deduct health insurance premiums Yes Yes*
After-tax profits double-taxed No Yes
Can defer taxes by reinvesting in business No Yes
Can deduct business loss against personal taxes Yes No
Must pay minimum annual corporate taxes Yes Yes

* C-corporations can deduct health insurance if the benefits are provided equally to all employees.

Personal service corporations

Personal service corporations are a special type of C-corporation which applies primarily to professionals and consultants. Personal service corporations have flat 35% federal tax rate (versus a gradual 15% to 34%). This higher tax rate is imposed on C-corporations which provide services in the health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting fields AND whose employees hold substantially all of the stock. Fortunately, professionals and consultants are allowed to elect S-corporation status and can avoid this high tax rate. There are also special state limitations for personal service corporation. Please see Professional Licenses.

Revenue versus profit

Hopefully your business will have lots of sales...however, don't make the mistake of believing that your sales revenue is available for hefty personal salaries or business expansion. Payroll must be paid first. Then you will have to pay for your cost of goods and your operating overhead. About 50% of the amount remaining must be paid in taxes (28% federal; 1-6.9% state; 15.3% employment taxes for owners). The remaining is available for your after-tax salary and business expansion.

Selecting Your Corporate Name

The Secretary of State must approve all corporate names. Many names are rejected because another company has already incorporated using that name. To avoid having your incorporation papers rejected because of name problems, it is best to reserve your corporate name first.

Your name must satisfy 2 conditions

Your proposed corporate name:

Must be acceptable to the Secretary of State; i.e. not misleading, and clearly distinguishable from other corporate names

Cannot infringe upon someone's trademark or tradename. The Secretary of State's office will not confirm this; it is YOUR responsibility to do this. You can check name availability at

Non-State businesses

If your true name is already taken in your State, contact the Secretary of State's office for assistance. Your business may have to be registered using a fictitious name at the state level.

Cost     $10

Other businesses can use your name without Inc. or Corp.

Incorporating only protects your full legal name (with Inc. or Corp.) from being used as the name of another State corporation. If you want to protect your business name from being used by others, you should consider registering it as a trademark or a service mark. Simply registering it as a trademark however, is not sufficient. You must consistently and continually use the trademark and watch for, and notify possible infringes of your trademark. Please consult a business attorney for further information.

120 day deadline

Your name is reserved for 120 days. If your Articles of Incorporation aren't filed by then, you must start again, and re-reserve the name with the Secretary of State. The law requires that you wait one day after your name reservation has expired to re-reserve the name.

Articles of Incorporation

Articles of Incorporation are the basic charter for your corporation. The original is kept on file with the Secretary of State. The Secretary of State will issue you a corporate identification number which should be used on all state tax payments and returns.

The Articles of Incorporation referenced here can only be used for corporations which: Articles of Incorporation are the basic charter for your corporation

  • Issue one class of common stock.
  • Are not involved in the professional services licensed by the state.
  • Are not starting a close corporation (a well known, but rarely used corporate form)

If you do not meet these requirements, contact your attorney or your state's Secretary of State's office.

Form to use

Articles of Incorporation

Time deadlines

Usually Articles of Incorporation must be filed within 120 days of reserving your corporate name or you will lose your rights to your reserved name.

Warning: If you won't be starting business until the beginning of a year, file your Articles of Incorporation in January, so that you won't have to complete tax returns until you begin business.

Information you will need

Name: Use the name you reserved with the Secretary of State.

Agent:List the name and address of one person (a resident of the state where you are incorporating) who is willing to accept all official mail on behalf of the corporation. This person does not have to receive the corporation's general mail - (s)he is only agreeing to accept legal notices or summons (if they ever occur). List their street address, no P.O. boxes please!

Stock:See Issuing Stock to decide how many shares you will need to authorize. If you believe you might need more later, many corporations authorize additional shares now in their Articles of Incorporation but do not issue them until the corporation needs additional capital. You are not "stuck" with your decision, because you can always amend your Articles of Incorporation later to authorize more stock. If this occurs, you will have to pay a fee and you must call the Secretary of State's office for the current form.

Signature:An incorporator must sign your Articles of Incorporation. Although anyone can be an incorporator, they have certain responsibilities and therefore should be the primary organizer or responsible agent of the future corporation. Type the incorporator's name below the signature.

Cost: $60

Call the Secretary of State if

Call the Secretary of State or visit their website to obtain the proper forms to file if:

  • You change the number of authorized shares
  • You change the name or address of the agent for service between annual meetings
  • You change your corporation's name or
  • You close (dissolve) the corporation.

Be sure to check your Bylaws to determine whether you need shareholder and/or Board of Director approval and then document this approval in the meeting minutes.

Incorporated out of state?

Officially, you are supposed to register your corporation in the state where you are conducting business. If you incorporated out of state, you will register as a "foreign" corporation.

If your name is already being used in your state or is misleading, you may have to register a fictitious name (dba) with the Secretary of State. Also, you will be asked to obtain a statement of good standing from the state in which you were incorporated. For information, call the numbers below.

Corporate Bylaws

Bylaws are the foundation for your corporation - the operating guidelines.

If you have outside investors, we strongly urge that you talk with an attorney to discuss your particular business and the legal protections you and they may need.

Sample Bylaws

Click here for sample bylaws provided by

What to do:

Initial incorporator

Unlike articles of incorporation, bylaws can be changed to fit your needs - as long as the changes do not violate your state's law. The person who initially ratifies these bylaws is called the initial incorporator. The initial incorporator is generally the person who signed the Articles of Incorporation. The initial incorporator must decide (subject to later Board of Director confirmation):

  1. Where your principal office will be.
  2. How many directors your corporation will have.
  3. When and where your annual shareholder meetings will be held.

After these three decisions are made, the initial incorporator can prepare the bylaws. You can obtain bylaws online for under $10, you can use an incorporation book (at your library or bookstore), visit your county law library, write them yourself, or see an attorney. Bylaws contain the operating procedure for governing your corporation and include the information described below. You can amend your bylaws at any time by a majority vote of the shareholders.

The initial incorporator should also complete the Action by Incorporator minutes to authorize the initial directors and your bylaws. This document is included with the First Board of Directors Meeting information.

Number of directors

Directors can be anyone from within or outside the company. Some corporations include outside directors such as attorneys, tax advisors, or other business advisors. Outside means they do not own stock. Other corporations just have "inside directors".

State law usually requires corporations with:

  • 1 shareholder     must elect   1 or more directors
  • 2 shareholders   must elect   2 or more directors
  • 3 shareholders   must elect   3 or more directors

What bylaws need to contain


Says where your principal office will be.

Board of Directors

You will have ______(insert number) members on your Board of Directors. Describes how long your Directors will serve (one year), who will conduct Board meetings, and what constitutes a quorum (a majority of authorized directors). One person has one vote on the Board of Directors.

Corporate officers

Describes three officers apopointed by the Board: President, Secretary and Chief Financial Officer. A Chairman of the Board and Vice Presidents can also be elected. One person can hold more than one office. But since stock certificates require the signatures of the President and the Secretary, as a security precaution, the same person should not hold both offices simultaneously, unless there is only one corporate director.

Shareholder meetings

Describes when shareholder meetings will be held, how shareholders will be notified, what constitutes a quorum for shareholder decision (a majority of shares entitled to vote) and how votes are to be cast (ballots are not required). Shareholders can cast one vote for every share that they own.

Authorized signature

The Board must decide who can sign on behalf of the corporation.

Issuing stock

Describes how to transfer, exchange or replace stock certificates.

Corporate records

The corporation must keep books and records, which shareholders and directors have a right to see. Annual reports aren't necessary.

Governing law

States that the governing law is (your state).

Calculate what makes a quorum

To determine what constitutes a quorum, use these numbers in your bylaws:

Board of Directors Meeting: ____people (insert 1/2 number of board members)

Shareholders meeting: representatives for ______ shares (insert 1/2 number of shares issued)

These numbers may change if the number of directors or number of outstanding shares change.

Questions? Contact your attorney.

Issuing Stock

When you issue stock, you are deciding to divide the corporation's ownership and thus its profits.

Forms to use

Obey securities laws

Anyone who offers or sells stock must comply with securities laws or face criminal and/or monetary penalties. Currently, the rules for raising money on the Internet are being revised. Until this is completed, here are the current rules for selling shares in any company.

If you cannot meet these four criteria, you absolutely must consult an attorney before issuing stock

  1. A limited number of purchasers (usually 35 or fewer);
  2. Have not advertised the shares for sale;
  3. Only have purchasers who have a pre-existing relationship with you or other directors or officers;
  4. All purchasers have signed a purchaser's warranty saying they are purchasing stock for investment, nor with the intent to resell it.

Click here for securities requirements for your state.

How many shares? What price?

You may have as many shares as you want, and set any price for a share, as long as all shares that are initially sold at the same share price (i.e. you can't give a "special deal" to your Uncle Charlie). Many corporations set a share price of $1 or even less. By setting such low price, when the corporation increases in value, you will not end up with shares worth a ridiculous amount. You will also help avoid complications such as issuing fractional shares.

What can be used to pay for stock?

In order to purchase a share of stock, people can pay the corporation in cash, in services rendered, in equipment, in the assets of an existing business, or anything else the Board of Directors agrees to accept. However, unless you have an employee stock purchase agreement or plan, promissory notes or promises to pay cannot be used to purchase stock. If someone doesn't pay cash for the shares, the Board of Directors must agree what the cash-equivalent value of their contribution would be so they can verify that the shares are being issued fairly and the corporation is properly capitalized. This must be documented in the meeting minutes. Two warnings:

  • Remember that each time you issue a share of stock, you are agreeing to divide the corporation's ownership and profits into smaller pieces. Stock is not just a piece of paper - and you can't get it back! If you don't want to give up ownership, but need cash, consider borrowing from a bank or a shareholder and paying the loan back with interest.
  • Make sure that the total value of the stock you are issuing is enough capital for your corporation to operate the first year. The biggest mistake new businesses make is to be under-capitalized. Be sure to evaluate your cash flow requirements, so you can pay bills even if your customers haven't paid you.

Should your spouse own separate stock?

If you live in a community property state, your spouse automatically owns a partial interest in the stock, unless pre-marriage assets were used to purchase it. If this is an issue, please talk to your legal advisor because:

  • Even the spouse who is not a record owner of stock can sell his or her "beneficial" ownership interest in the stock.
  • Even if a spouse has separate ownership of stock, if (s)he incurs shareholder liability during the marriage, the couple's community property may be used to satisfy that debt.

Buy-sell agreements: protection from selling stock to outsiders

The Board of Directors can require that all new shareholders sign a buy-sell agreement which requires them to give other shareholders or the corporation the first right of refusal in any sale or transfer of shares. The sample agreement also includes repurchase provisions in case a shareholder dies or becomes disabled.

WARNING: All shareholders and their spouses should review the buy-sell agreement with legal counsel before signing. This agreement can significantly affect the signers in times of uncertainty - such as divorce or death - and in many ways can be more important than the corporate bylaws. All signers should understand and agree to all parts of the agreement - or modify the agreement as needed. For further information about buy-sell agreements, review "Making the Most of Buy-Sell Agreements" from the Journal of Accountancy.

What to do

  1. The Board of Directors should determine the value of each share of stock and the total value of stock to sell - for either cash or non-cash. If non-cash is accepted, the Board of Directors must determine the value of the non-cash contribution. All of these decisions should be recorded in the minutes of the initial meeting of the Board of Directors.
  2. If the stock price is not $1 per share, divide the total value of stock the corporation is selling by the value per share to determine how many shares of stock to issue. Verify that you are issuing fewer than the shares authorized in your <Articles of Incorporation.
  3. The Board of Directors must decide whether to require shareholders to sign a buy-sell agreement. If so, this should be documented in their meeting minutes. A paragraph, or "legend" referencing the buy-sell agreement should be typed on each stock certificate.
  4. Collect the funds from each shareholder. Make checks payable to the corporation. Issue a stock certificate. Issue a receipt showing whether it was paid in cash or the non-cash contribution and its cash equivalent value. Have the stock purchaser sign a Purchaser's Warranty and place it in your corporate records. Prepare one stock certificate for each shareholder, showing how many shares they purchased.
  5. Make a copy of the completed stock certificate for your records. Note: Although a corporate seal is not required by law, if the Board of Directors chooses to require one, the seal can be placed anywhere on the certificate.
  6. Record the information from each certificate on the corporate register. You must list the date the stock was issued, the shareholder's name, certificate number and the number of shares. Keep the register with your bylaws, articles of incorporation and corporate minutes

How to complete the certificate

Lines and what to do

Left top block: Certificate number - you can start with any number 1, 100, 1001, etc.

Right top block: Number of shares - type in the number.

Middle large block: The legal name of your corporation.

Middle smaller block: Number of common shares (you can put the par value if you want).

First line: Purchaser's name - a married purchaser should talk with an attorney to discuss whether to hold title separately or jointly

Second line: Spell out the number of shares

Space: The legal name of your corporation

Date line: The date the stock was issued

Signature line: Signatures by both the Secretary and President

Can you issue more stock later?

Yes, after consulting an attorney regarding securities laws and obtaining Board of Director approval, stock can be issued at any time. If you issue new stock, the price of each share of stock does not have to be the same price as your initial shares - and should be higher if your company is more valuable, lower if your company has declined in value. However, there may be consequences if you issue stock to initial investors at a very low price and shortly thereafter you issue stock to another group for a much higher price.

Dividing the pie and dilution of shares: Owning stock is like having one piece of a pie. Ideally, when more shares are issued, the business is growing, i.e. the pie is getting larger- but each existing shareholder has a smaller percentage of the larger pie. That is called diluted shares. It is why the original owners of corporations that go public can have less than 1% of the shares, but that 1% is worth millions.

Sometimes shareholders purchase shares and want the agreement that their shares won't be diluted if more stock is issued. You can sign an agreement where they have a right (not the obligation) to purchase additional shares at the same price so that their percentage ownership remains the same. This is NOT in the sample agreement - so please see an attorney for the proper agreement.

Shareholders can sell their stock

A shareholder may sell his shares to another person at any time, subject to any buy-sell agreements or securities laws. They must advise the corporation of this sale by turning in the old stock certificate. The corporation must then record the transaction and issue a new certificate.

The corporation can never benefit from any profit or loss on the transaction - it is strictly a private arrangement between the buyer and the seller.

Please read the information regarding buy-sell agreements. This agreement limits how the shares can be sold.

Questions? Call your attorney.

Securities Regulations

Corporations, limited liability companies and limited partnership are subject to the securities laws because they are offering ownership interests in a business. You must comply with federal and state securities laws or you will face criminal penalties including jail sentences and monetary fines. Federal and state securities laws are complex and require legal advice.

The big picture is that if you have owners in multiple states, you need to follow federal SEC rules. If everyone is in one state, you follow that state's rules. If ALL investors have full knowledge and are sophisticated investors (i.e. they are not investing their life savings in a get-rich quick scheme), you can be exempt from state filings. But if even one person doesn't qualify, your exemption will be void.

Please be aware that the law requires that purchasers be given full and accurate disclosure of all material aspects concerning the business they are purchasing an interest in.

Review website

First Board of Directors Meeting

In order to establish liability protection for your shareholders, you must follow specific rules rules which include:

  • Having annual meetings
  • Electing directors
  • Making sure those directors approve the corporation's major decisions
  • Keeping corporate and personal assets separate.

The action by the initial incorporator and the first Board of Directors meeting are critical - because without them, you will not have a corporation. These first steps set up your board of directors, bylaws and authorize the corporation to issue shares of stock.

Forms to use

Initial Action by Incorporator

Minutes from First Directors Meeting

Waiver of Notice for Directors Meeting

Initial incorporator's tasks

The initial incorporator (the person who signed your Articles of Incorporation) should:

  • Choose the initial directors of the corporation (to serve until the shareholders' meeting)
  • Adopt the bylaws
  • Choose the initial officers (if the Board of Directors' meeting is delayed and the business is already operating)
  • Complete the Action of Incorporator minutes. These minutes require:
  • The corporation's name

  • The date that the Articles of Incorporation were filed
  • A list of the initial directors
  • The incorporator's signature and date.
  • Place these minutes in the corporation's permanent corporate records book.

Initial Board of Directors meeting

Before you have the meeting, read the following sections below:

Once you are familiar with this information, you are ready for an official Board of Directors meeting. Basically, it is just a normal meeting (assuming you have the required quorum), but at the end, you record the decisions you made in corporate minutes and keep them for your records. This kit includes sample minutes which your corporate secretary can complete. The minutes do not have to be typed or have fancy legal words. They do need to show what decisions you made in the areas shown below.

Topics to decide at the first meeting

At the initial Board of Directors meeting you must:

  • Elect corporate officers to serve for the next year. One person can hold more than one office.
  • Adopt bylaws and approve the Articles of Incorporation
  • Authorize and issue stock to initial shareholders
  • Determine when your future Board of Directors meetings will be held
  • Determine when your future shareholder meetings will be held
  • Record who was there and keep minutes of your meeting
  • Have each director who didn't attend sign and approve a copy of the minutes and place them in your minutes book (or sign a Waiver of Notice and Consent notice).

Optional topics

If you want, you may also:

  • Decide whether to require shareholders to sign a Buy/Sell agreement
  • Determine who is authorized to sign on behalf of the corporation
  • Choose your bank, accountant, attorney, etc.
  • Set salaries for directors (their pay for attending a director's meeting) and for senior management
  • Decide whether you want to be an S-corporation
  • Choose your accounting method
  • Authorize payment of initial start-up expenses
  • Decide whether to offer employee benefits, such as health, accident and disability insurance
  • Discuss your business' insurance needs
  • Authorize major purchases, contracts and leases

When to hold the meeting

Hold the meeting before you issue stock or make any key business decisions. In the future, Board of Directors meetings should be held regularly throughout the year and whenever the corporation has a major decision to make.

Your bylaws require:

Your bylaws require:

  • Quorums A meeting is not valid (i.e. you cannot conduct business) unless there is a quorum. For the Board of Directors, a quorum is a majority of the board.
  • Absent Directors If some directors do not attend a meeting (but you still have a quorum), have each absent person approve a copy of the minutes (write "approved" on the minutes, have them sign their name and put the signed minutes in your corporate files) and/or sign a waiver of notice and consent to meeting form.
  • Advising directors about meetings The bylaws state that every director should be notified before a meeting. Please make every attempt to notify all directors of your meeting in advance. Clear communication is the best way to avoid future problems.

Fortunately, you are not required to send written notices for board meetings and you may conduct business (as long as a quorum is present at the meeting) if each director:

  • Shows up to the meeting and doesn't protest the lack of notice
  • Doesn't show up, but signs a waiver of notice and consent to the meeting
  • Doesn't show up, but signs and approves the minutes of the meeting.
  • Directors may attend meetings by conference telephone if all participants can hear everyone at all times. Further, all shareholders are generally allowed and welcome to attend all Board of Directors' meetings.

Voting At Board of Directors meetings, one person has one vote.

Minutes should include:

  • The time, place and actions taken
  • The pros and cons of any controversial decision
  • Key factors that you considered and how that decision will benefit the corporation
  • Who voted for, against, or abstained from each resolution or indicate that the vote was unanimous.
  • When someone leaves or arrives during the meeting in relation to the business voted upon.

File your corporate minutes with your bylaws and Articles of Incorporation. By keeping these detailed minutes, you are showing that the directors acted responsibly in what they perceived to be the best interest of the corporation.

Questions? Contact your attorney.

First Shareholder's Meeting

All corporations must hold at least one shareholders meeting per year.

Forms to use

Minutes for First Shareholders Meeting

Waiver of Notice for Shareholders Meeting

What to do

After you have had a Board of Directors meeting, authorized stock and voted for directors, hold a shareholders meeting. At that meeting:

  • Inform the shareholders of the status and affairs of the corporation
  • Ratify any insider transactions - only after discussing them with an attorney
  • Keep minutes of your meeting
  • Have each shareholder who didn't attend sign and approve a copy of the minutes and place them in your minutes book (or sign a Waiver of Notice and Consent form).

Legal details

Your bylaws require:

  • Quorum and voting A meeting is not valid (i.e. you cannot make decisions) unless there is a quorum of people representing a majority of shares.
  • Absent Shareholders If some shareholders do not attend a meeting (but you still have a quorum), have each absent person approve a copy of the minutes (write "approved" on the minutes, have them sign their name and put the signed minutes in your corporate files) and/or have them sign a waiver of notice and consent to the meeting form.
  • Advising shareholders about meetings The bylaws state that every shareholder should be notified before a meeting. Please make every attempt to notify all shareholders of your meeting in advance. Written notices to shareholders are not required if a quorum is present at the meeting and if each shareholder:
    • Shows up to the meeting and doesn't protest the lack of notice
    • Doesn't show up, but signs a waiver of notice and consent to the meeting
    • Doesn't show up, but signs and approves the minutes of the meeting.

  • Shareholders may attend meetings by conference telephone if all participants can hear everyone at all times.
  • Voting At shareholder meetings, shareholders cast one vote for each share of stock that they own (i.e. the largest owner has the biggest say).

Your minutes should include:

  • The time, place and actions taken
  • Outcome of any vote taken and who voted for, against or abstained.
  • File your corporate minutes with your bylaws and Articles of Incorporation.

Questions? Contact your attorney.

Election of S Corporation Status

Corporations which elect to be S-corporations avoid double federal taxation on corporate profits. With S-corporation status, all the corporations' net income is passed through to the shareholders and the shareholders pay taxes on this income.

Without S-corporation status, the net income would have been taxed twice: first as corporate profits and then on shareholder dividends.

Forms to use

IRS 2553 Election of S Corporation

Some basics

You can be an S-corporation if your corporation

  • Incorporated in the U.S.
  • Has one class of stock;
  • Has no more than 100 shareholders;
  • None of your shareholders are non-resident aliens (non-US residents);
  • None of your shareholders are partnerships or corporations
  • Your corporation isn't a bank, an insurance company or part of an affiliated group of corporations.


  1. All shareholders must sign form 2553, electing S-corporation status.
  2. Shareholders are required to make quarterly tax payments on their percentage of the S-corporation's net income. Thus, S-corporations usually distribute their profits quarterly. Note: Without S-corporation status, shareholders would only have to pay quarterly tax deposits if they were paid dividends during the quarter.
  3. Tax year-end restrictions: All shareholders and the S-corporation need to have a 12/31 tax year.

Talk with your tax advisor

Choosing whether to be an S or a C-corporation is a very important tax planning decision that should be done with your tax advisor.

C-Corporation status: Good choice for businesses which want to reinvest profits.

A C-corporation is beneficial if you want to accumulate earnings for a business expansion. If your corporation's tax rate is 15% or 25% while your shareholders have a 28% tax rate, you can decide not to pay dividends - so there isn't double taxation - reinvest most of your earnings for business expansion and have a lower overall tax rate than if you had chosen S-corporation status and distributed all your profits.

C-corporations can offer employees incentive stock options; S-corporations cannot.

S-Corporation status: Good choice for businesses which expect initial losses.

Initial business losses can only be passed through to S-corporation shareholders, not C-corporation shareholders.

We suggest that you consult with your tax advisor before mailing in this form to make sure that your corporation qualifies as an S-corporation and to discuss the pros and cons of this decision.

Time deadlines

Within 75 days of filing your Articles of Incorporation. You can also choose S-corporation status anytime by filing the form before March 15th of the year that you want to begin your S-corporation status.

What to do

  • The Board of Directors should vote to elect S-corporation status and this should be recorded in the minutes.
  • Complete form 2553. If you elect a 12/31 year-end and aren't a trust, you only have to complete Part I of this form. All shareholders must sign the form and should have a 12/31 tax year. Keep a copy for your records.
  • Mail form 2553 to the IRS. The IRS should send you an acknowledgement letter.

How to complete the form

Lines and what to do

A: Employer identification number is the number you received after obtaining a federal EIN.

I: Your proposed tax year-end. If this is not 12/31 you must complete Part II of this form.

J: Each shareholder's name, signature, number of shares owned, date acquired, and social security number.

Parts II and III: Only complete these sections if you want to have a non-12/31 tax year or you are a trust. Please consult with your tax advisor for specific instructions on completing this portion of the form.

Changing your mind

Shareholders may vote to revoke their S-corporation status at any time. The effective date is January 1st of either the current year or the following year, depending on when the revocation was made. Call the IRS for the proper form.

To mail

Click here for mailing instructions for form 2553.

Questions? Call the IRS information hotline (800) 829-4933. For forms, call (800) 829-3676 or obtain them online at

There is no formal action required to start a sole proprietorship.

Business License and Other Local Requirements

Each city's business requirements vary. The following is a general description of these requirements.

Before you sign a lease or purchase equipment:

  • Verify that your proposed location complies with zoning requirements (including parking requirements and fire regulations).

  • Find out from the city building department if there are any code compliance issues.

  • If you are preparing food, talk with the County Environmental Health Department to verify that they will allow you to use existing equipment and facilities.

Zoning Permit

  • Usually you only need to get a zoning permit if you are changing the use of a building or if you are starting a home occupation business. Cities charge a nominal fee for home occupation permits ($50 is common). However businesses which want to change the existing use of a building may pay a fee, depending on the complexity of the request.

Business Tax/License

  • Most cities require anyone who conducts business in their city to obtain a business license and pay a business tax each year. The initial business license fee is usually the minimum business tax plus an administrative fee. In future years, the business tax is based on gross receipts, number of employees, or other criteria. The exact criteria depends on your type of business and your city's policies.

Home Occupation Permits

  • Home occupation permits are usually issued by the Planning (or Community Development) Department and are required before you obtain a business license. Business owners must agree to comply with the city's home occupation restrictions. These generally include:

  1. No visible sign of the business
  2. No altering the home
  3. A space limit for the business (example, 25% of the home)
  4. No employees
  5. No large deliveries or significant storage
  6. Off-site parking for vehicles
  7. No hazardous materials
  8. Limitations on what business you can operate (example, no barbershops)

Contact the Planning Department for a Complete List.

Sign permit

  • Many cities regulate the size, color, placement and number of signs you can display. This includes temporary signs and "sandwich boards" placed on the sidewalk. They may also require a building permit to install permanent signs. In general, home businesses cannot have business signs.

Other necessary permits

  • If you are making renovations or want to put a planter outside your door, chances are that you'll need a sign or building permit.

Fire inspections

  • Commercial buildings are inspected annually by the fire department. This service is generally free except for restaurants, bars, theaters, and other places of public assembly, which may be charged an annual fire permit.

Handling food

  • If you handle food in any way, you'll need a Health Permit. This is typically issued by the County Environmental Health Department.


  • Please contact your local city or county.


Many companies require their vendors to provide D&B, SIC or NAICS numbers before they will conduct business. These numbers are available at no cost.

D&B Number

  • Dun & Bradstreet is a private company which monitors business credit. They provide a free number to any business that is willing to wait 30 days. They also provide expedited Duns numbers and credit services on a fee basis.

  • To obtain a free D&B number, click here and enter your business ownership information.

  • Business credit is established through trade references, which are reported on a voluntary basis to a company such as Dun & Bradstreet. Usually, new businesses must wait a few months to start establishing credit. If you want to establish business credit with Dun & Bradstreet, you can provide references to Dun & Bradstreet, which they will verify to give you a credit rating. This is a fee-based service, and you must have 4 to 6 references which Dun & Bradstreet can verify. You can also improve your credit rating by providing D&B with information about contracts that you have received. For more information, visit or call (800)234-3867.

  • Other resources available through the bookstore:

    1. All about Credit

    2. ABCs of Getting Out of Debt

    3. Credit Repair Kit

SIC Number

  • SIC stands for Standard Industrial Code, which is a system that categorizes all products and services. The SIC system is being replaced by the NAICS system (below), but some companies still request an SIC number. To obtain an SIC number, go to and enter your product or service. If you sell multiple products or services, you may have multiple SIC codes.

NAICS Number

  • NAICS stands for North American Industry Classification System, which has replaced the SIC system to categorizes all products and services. To obtain your NAICS number (no charge), go to and enter your product or service. If you sell multiple products or services, you may have multiple NAICS codes.

Patents, Trademarks, and Copyrights

A patent is an exclusive right conferred by law to an owner of an invention to exclude others from making, using, or selling the patented invention for a limited time. The government grants this temporary monopoly in exchange for a full description of how to make and use the invention. The cost of obtaining a patent depends on the type of invention and the degree of complexity involved. To ultimately receive a patent, the owner of the invention will need to file a nonprovisional patent application. Roughly, the costs may range from about $5,000 to about $7,000 for an extremely simple invention (such as a golf training aid) to more than $15,000 for an invention involving highly complex technology (such as telecommunication technology). Some points to be aware of include the following:

  • Patents only protect you in the jurisdiction in which they are obtained. Therefore, a U.S. patent only prevents people from making, using, or selling the invention or a product that contains your invention in the U.S. If your patent has realistic market opportunities and high economic potential consider patenting it in other countries as well.

  • Be prepared to pay periodic fees to maintain your patent.

  • Patents are only valuable if they are valid and enforceable.

All these factors point to the reason that professional patent attorneys are usually hired. Despite that, you can do some of the work to lower your costs. See Resources below.

Before we Begin...a Warning on Scams

3 Types of Patents

There are three types of patents:

  • Utility: A utility patent may be granted to anyone who invents or discovers any new and useful process, machine, article of manufacture, compositions of matter, or any new useful improvement. For further information, visit

  • Design: A design patent may be granted to anyone who develops distinctive visual ornamental characteristics for a manufactured item. The design must be a definite pattern or shape, applied to an article of manufacture. An example of a design patent would be a toothbrush manufactured to look like a spaceship, or an ornamental design for a cell phone case. For further information, visit

  • Plant: A plant patent may be granted to anyone who invents or discovers and asexually reproduces any distinct and new variety of plant.


    You can find out what patents have been filed that are the same or similar to your product by using Google's search tool.

    Patent search tool from Google

    You can search and apply for patents online at the Patent and Trademark website:

  • Please remember that the wording (especially the claims) for patents is critically important to validity and enforceability and that a professional patent attorney should be consulted.

  • Providing a full and detailed description including drawings to your patent attorney can reduce cost.

  • Patent applications are carefully scrutinized and often rejected for revision by the USPTO. Thus, you should budget for prosecution expense (the "back-and-fourth" with the Patent Office) after your application is filed.


  • For questions, you can call the U.S. Patent and Trademark Office at: (800) 786-9199.

Software Concerns

  • If you have written software (or have employees or independent contractors who have written software), please consult an attorney to discuss whether to patent, copyright, or obtain trade secret protection!

Trademark vs Service Marks

  • Trademarks are generally the words, logos, phrases and symbols used by manufacturers to identify the goods that originate from them. However, trademarks may also include sounds (e.g., the NBC chimes), scents (e.g., a fragrance for sewing and embroidery thread), colors (e.g. "pink" for insulation), and shapes (e.g., a silhouette of an "apple" for computers). Subject to limitations, almost any symbol, name, word, or device capable of distinguishing the source of goods may be used as a trademark.

  • Service marks are used to identify the source of the services of one individual or organization from those provided by others. Service marks and trademarks function in the same manner except that service marks identify the source of services rather than goods.

What to do

  • You can talk with an attorney experienced in trademark matters or do your own computerized search with help from your county or local law library. There are also professional search services that can do trademark database searches for you or your attorney (typical charge: $300 to $400 for a basic screening search).

  • Once you have researched the trademark for potential availability, the cost for filing for registration is about $1000 including attorney fees and fees to the U.S. Patent and Trademark Office. You cannot register a trademark unless it is being used in commerce (although you may apply for registration based on an "intent-to-use") and you will lose your trademark protection if you do not continue to use it in commerce. If you use your trademark in multiple states or serve customers in more than one state, you should register the trademark with the U.S. Patent and Trademark Office at: The trademark registration process can take close to a year.


  • Copyrights protect "tangible expression" such as that found in written documents, songs, recorded performances, computer programs, and art work (including advertising). The cost is very low (about $35 per application to register a work if you do it yourself online) and it is possible for nonprofessionals to do - although the more valuable your work, the more worthwhile it is to have an attorney involved.

  • Alternatively, a fee for filing an application for registration using paper forms is about $65. To request the appropriate paper copyright registration form, visit:

  • Appropriate paper forms include:

    1. Literary (example: Novels, poetry, articles) (TX)
    2. Single Serials (example: Serials, magazines, newsletters, newspapers) (SE)
    3. Sound Recordings (SR)
    4. Performing Arts (example: Song lyrics) (PA)
    5. Visual Arts (VA)

  • The law is very strict on requiring written agreements if the copyright is assigned to another individual, a partnership, corporation or other entity.

  • The best practice is to consult with an attorney before commissioning any work or using someone's work.

  • Questions about the process or the forms? Visit


  • The information herein should not be used or relied on as legal advice or opinion about specific matters, facts, situations or issues.

  • You should consult a lawyer about your particular circumstances before you act on any of the information contained in these pages because the law changes, can vary from jurisdiction to jurisdiction, and may not apply to your situation. This information is intended to assist you in understanding the basics of intellectual property law. It is not a complete guide and should not be considered legal advice.

Business Insurance

Owning a business can often mean that if you get sick or injured, you get a double-whammy: the illness (with its expenses) and no more income. Insurance is extremely important.

The National Association of Insurance Commissioners have a tutorial which explains the forms of insurance and gives tips for evaluating insurance options. Go to

Below are some basic forms of insurance. Only workers compensation is required by law. However, some landlords and businesses involving hazards will only conduct business with you if you have proof of insurance.

Types of business insurance

Property insurance:

  • For theft or fire. Earthquake and flood protection must be purchased separately.

Liability insurance:

  • If you are sued by someone

Business interruption:

  • Provides substitute income if your business is damaged from theft or fire.

Key person insurance and group life insurance:

  • Provides a lump-sum payment if a key person dies or cannot work anymore.

Home-Based business insurance:

  • Covers items not normally covered with a homeowners policy, such as inventory and office machines.

Commercial auto:

  • Covers you and your employees for work-related accidents.

Workers compensation insurance:

  • Required by law for businesses with employees. Pays for expenses and provides income if employees are injured while performing the job.

Health insurance:

  • Pays for medical expenses (except expenses covered by workers compensation insurance).

Talk to an agent:

  • Every business owner should discuss their insurance needs with an authorized agent. In particular, home occupation businesses should review their homeowner's policy to determine whether that policy covers their home business.

On-the-job injuries:

  • If you have employees, you are required by law to carry workers compensation insurance. However, this insurance is generally not available to business owners. Instead, sole proprietors and partners must carry their own health and disability insurance.

Ask vendors for certificate of insurance:

  • Before you conduct business with others - especially if they will handle your products or will perform a potentially hazardous job (even driving a car), ask them to provide you a certificate of insurance from their insurance carrier.