Incorporating Tips Capitalization
Below is a MRR and PLR article in category Business -> subcategory Small Business.
Understanding Capitalization When Incorporating Your Business
Summary:
Capitalizing a new business entity is vital. Skipping this step can result in legal complications, especially if the business faces a lawsuit. Here’s what you need to know about capitalization and the necessary steps.Capitalizing Your Corporation
Capitalization refers to funding your corporation, giving it financial substance through money or assets. This process typically unfolds in two main ways:
Corporate Stock
To be a shareholder in a corporation, you must own stock. If you’ve ever traded on the stock market, you’re familiar with this process. For example, purchasing shares in a company like Sirius Radio makes you a shareholder. Similarly, owning a corporation requires you to exchange cash, property, or services for shares to become a shareholder.
Let’s consider a practical example. Suppose I'm launching a corporation to offer consulting services. The corporation is formed with 10,000 shares, and I intend to be the sole shareholder. I decide to exchange $3,000, along with a copier, fax machine, and computer equipment, for stock in the corporation. This written exchange serves as the corporation's capitalization.
Corporate Loan
You can also provide a loan to your corporation to cover start-up costs. There are no restrictions against lending money to your own corporation. However, this should complement, not replace, buying stock. From a tax perspective, segmenting your initial capitalization into loans and stock purchases can be advantageous.
Inadequate Capitalization
State laws dictate the formation of a corporation, including formulas or amounts for minimum capitalization. It's crucial to review these laws in your state to ensure you meet the required contribution minimums.
Improper capitalization can be disastrous if your entity faces a lawsuit. An opposing party might argue that the corporation was not a viable entity due to insufficient funds. If a court sides with this argument, it may disregard the corporate shield, exposing shareholders, directors, and officers to personal liability?"a potentially catastrophic outcome.
Conclusion
If you’ve purchased a corporation through an online service, there are crucial steps ahead. Verify your state’s minimum capitalization requirements and ensure compliance to safeguard your business.
You can find the original non-AI version of this article here: Incorporating Tips Capitalization.
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