subject: Forming An Illinois Corporation: Next Steps After Filing [print this page] The first steps of forming an Illinois corporation are pretty straightforward: file the articles with the secretary of state, receive an EIN from the IRS, determine the corporate by-laws and have your initial meetings with stockholders and the board of directors. But then what? Even after these initial steps, your corporation still isn't truly set up. You still have a few tasks within the business to complete:
Step 1: Transfer Assets and Liabilities to the New Corporation
The mere act of incorporation doesn't actually transfer assets and liabilities from an existing business to the new corporation--even when it's clear that's what you intend.
Because of this, you'll want to transfer such assets and liabilities in exchange for stock. Also make sure to document this as you do it. For example, if you wish to transfer a truck worth $10,000 and a bank loan secured by the truck worth $5,000, this will need to be documented in the stock ledger and subscription records.
Just two quick points about transferring assets and liabilities to your new corporation: First, make sure you re-title the assets and liabilities in the name of the new corporation. Sometimes you can do this simply with a bill of sale, but for assets taxed by the state (in Illinois, this includes cars, real estate, etc.), the state will need to provide a new title to the asset. As for liabilities, you'll need to work with the lender to update documents regarding the loan.
A second point is this: Be sure not to transfer any personal liabilities (for example, a personal credit card) when you transfer your business' liabilities to the new corporation. Also be sure that the total liabilities you transfer is less than or equal to the depreciated basis of the assets you transfer. Be careful! Failure to pass either of these two tests (the "personal liabilities" and "excess liabilities transferred" tests) may lead the incorporation to trigger income taxes.
Tip: Confer with your tax adviser if incorporation will possibly trigger income taxes.
Step 2: Obtain Any Needed Business Licenses from State or Municipal Government
Often, states and municipalities require businesses to have a business license. Therefore, if your new corporation will operate a business, the corporation will need its own business license.
Sometimes, even experienced entrepreneurs forget to acquire a business license. But remember this: If you previously operated your business as a sole proprietorship, the business' license was your personal business license. However, your new corporation is, legally, a new person, and will need its own business license. There is quite a bit of general information on these licenses on the business.illinois.gov web site.
Also note: The Illinois Assumed Name Act requires you to register your business with the county clerk's office, no matter what the structure of your business.
Step 3: Setup Your Accounting System
The simple financial records needed by a small sole proprietorship just don't cut it for a corporation. So your new corporation is going to need a new, full-fledged accounting system.
Here's why: While a sole proprietorship only needs to report its profit and loss and provide starting and ending inventory balances, a corporation needs to provide balance sheet information. In fact, if a corporation's revenue or assets exceed $250,000, the corporation needs to supply a solid balance sheet as well as several supplementary financial schedules as part of the annual corporation tax return.
In order to supply this information, you need to install and operate a real small business accounting system--something like Intuit's QuickBooks program.
Remember, having a real accounting system isn't just a good idea, it's necessary to correctly prepare your tax return. Furthermore, you must use accounting methods that clearly present the income of the corporation.
Step 4: Finding a Good, Local Accountant
A final, quick comment: You want, if you're running a corporation, to find a good local accountant right at the start. You will richly benefit by having someone help you setup and run your accounting system and help you minimize the taxes and red tape burden that politicians of all stripes lay on the back of small business owners and managers.
A tip for finding the right accountant: Ask around for someone who handles other people in your same business or another industry like yours. There's quite a bit of industry-specific tax law and regulatory monkey business... and having someone in your corner who's experienced will deliver big benefits.
