When thinking about owning and operating a small business, consider buying an existing one. There are a lot of good reasons to do this such as current relationships with vendors, suppliers and customers. However, don't forget about the risks, too.

The next step is to determine what type of ownership structure you should set up. There are many ways to set up a business, but in most cases you want the one that protects your assets and personal property the best. Even if the business you bought was only a partnership or sole proprietorship, it isn't too late to set up a corporation.

Why Incorporate?

Deciding to incorporate an enterprise is influenced by a number of factors such as:

• Limitation of personal liability: Shareholders of a corporation are shielded from personal liability for the debts and obligations of the corporation. Sole proprietors and general partners, on the other hand, are personally liable. So, generally, if a corporation defaults on a bank loan, the bank can't sue you, as a shareholder, and take your house as repayment on the loan.
• Selling your stake in the business: Your stake or investment in a corporation is represented by shares of stock, and they are freely transferable; that is, they can be sold to anyone who wants them. However, selling a partner's stake in a partnership, for example, is strictly limited. Partnership agreements usually limit if an interest can be transferred at all, and to whom. In addition, some states have laws that provide that a partnership ends if a partner's stake is sold or transferred to someone else.
• Corporations have a lot more ways to raise the money they need to grow and withstand financial turbulence. They can issue stock and gain more stockholders, or long-term bonds using the company's assets as collateral. Profits can then be reinvested into the company.
• Continuity of existence: A corporation ordinarily has no restrictions on the continuation of its existence, while a partnership is usually limited to a period measured by the lives of its members.
• Centralized management: In a corporation, shareholders ordinarily delegate management responsibility, contrasted to the members of a general partnership, who have the power to commit the firm to contractual obligations.

Procedure for Incorporation

Basically, there are three ways to incorporate a business:

• The business "sells" its assets to the corporation in exchange for corporate stock, which the firm then distributes to its members when the old business is liquidated
• The business liquidates, distributes its assets to its members, and the members "sell" their interests to the corporation in exchange for stock
• The business members "sell" their ownership interests directly to the corporation in exchange for stock

The mechanics of incorporating an existing business are essentially the same as incorporating a new business from scratch. The process is governed by state laws, which vary from state to state.

You'll need to write articles of incorporation, which contain the corporation's name, address, and name of its "registered agent," the person who accepts important documents on behalf of the corporation, such as legal and tax documents. The articles are filed with the appropriate government official in the state where you're incorporating, usually the Secretary of State.

Corporate bylaws, which set out how the corporation runs - when the annual directors and shareholders meetings will be held, voting procedures for business decisions, and the number of officers and directors.

Some Issues to Think About

The major issue in incorporating an existing business is how the old business's debts are handled. Usually, the individual members of the old business who were liable for debts incurred before incorporation will remain personally liable after the transfer of their assets, unless the:

• Creditors agree to release the old business's members and to substitute the new corporation as the debtor
• New corporation agrees to pay the old business's debts

Drawbacks

Some potential drawbacks to incorporating have to do with the old business's contracts:

• Does the old business have incomplete contracts for goods or services? If so, are you prepared to undertake those contracts? Will customers want to continue to do business with you?
• Does the old business operate in a leased building or land? If so, can the lease be assigned to the new corporation? Does the landlord have to consent to the assignment?
• Are creditors and suppliers willing to continue to do business with the new corporation? If so, are the terms the same? For example, if a supplier sold the old business raw materials at a competitive price, will supplier give the corporation the same or better price, or will it increase the price?

Questions for Your Attorney

• How much will it cost to incorporate an existing business, and how long will it take?
• If I buy a partnership that's doing business under a fictitious name, can I use that name after I incorporate the business?
• I want to buy an unincorporated business. The owner doesn't want to sell me the business equipment, but he's willing to lease it to me. Should I do that?

Related Resources on Lawyers.com^sm

- Where to Incorporate Your Business
- S-Corporations
- Corporate Organization and Start-Up Costs
- Business Entity Planning Worksheet (Installation Required)
- Articles of Incorporation Worksheet (Installation Required)
- State Business Information Web sites for more help
- Small Business Law articles and information
- Find a Business Law Lawyer in your area
- Visit our Business Organizations Message Board for more help