One of the decisions you’ll need to make if you’re an owner looking to start a small firm is how to organize it. Sole proprietorships, general partnerships, limited liability companies, and corporations are available as alternatives for business structures. Each kind of entity has advantages and disadvantages. Today, in this guide we will discuss how to start a corporation, the benefits of starting a corporation, and whether it’s the right business structure for you!
It’s crucial to choose the right company structure for your startup company. Because of the benefits for shareholders and liability protections provided by corporations, many business owners choose to form one. Also Read, How To Set Up An LLC In 7 Steps.
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The incorporation procedure is complicated by the fact that corporations have the most complex and regulated structure when compared to other business entities. A corporation must be formed and maintained, which involves a lot of paperwork, administrative effort, and costs. However, despite the fact that they could be the most challenging company to establish, they also provide owners and stockholders with the best liability protection. Check our guide on Best And Cheapest LLC Services.
A corporation can prevent you from any commercial responsibilities and assist in the launch of your business because it is a separate legal entity from its owners. Starting an organization might be the best option for you and your company, whether it’s to increase your reputation, protect yourself, attract investors, or save money on taxes.
You will learn how to form a corporation from this guide, along with a tip that will expedite the process and make things much simpler for you. Here is all the information you require to form a corporation. So, let’s get started.
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What Is A Corporation?
A corporation is a company that the state recognizes as a separate legal entity from its owners (also known as shareholders). Ownership of a corporation may be held by individuals, other legal entities, or both, and stock purchases and sales make ownership simple to transfer. A company can engage in a lawsuit on its own and shield its founders from personal accountability because it is a separate legal entity.
While a corporation’s exact legal definition varies from country to jurisdiction, its most crucial feature is always a limited liability. This indicates that while shareholders may benefit from dividends and stock appreciation, they are not personally responsible for the debts of the business. Read our guide on Delaw
To form a corporation, you must conform to the laws of your state. These conditions frequently involve the writing of corporate bylaws and submitting articles of incorporation to the secretary of state. It may take weeks or even months to gather all the data necessary to submit your articles of incorporation, but once you’ve done so successfully, your company will be legally accepted as a corporation.
Your corporate structure becomes a distinct legal entity once you set it up as a corporation. By doing this, the business will be able to execute various legal contracts, ask for loans, and file lawsuits. Additionally, as it is protected by law, you and the other shareholders are not personally responsible for any legal problems, debts, or responsibilities. Also Read, S Corp Vs LLC: Which Is Best For Your Business?
They are arranged in a two-level way. Ownership comes first, followed by management. A corporation’s board of directors serves as the management level, and shareholders are typically regarded as the owners. The board members are selected and chosen by shareholders. Additionally, C corporations and S corporations are two separate forms. There are an infinite amount of stockholders in a C corporation. You can also apply to list as a publicly traded firm on the stock market. After that, the general public can buy firm shares.
For federal tax reasons, corporations that choose to pass on corporate revenue, losses, deductions, and credits to their shareholders are referred to as S corporations by the Internal Revenue Service (IRS). S corporations are essentially created so that an owner can deduct business expenses from their personal taxes. By doing this, it is possible to prevent paying two taxes.
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Benefits Of Starting A Corporation
Being a corporation has a number of benefits, such as less personal liability, simple ownership transfers, business continuity, greater access to capital, and (based on the corporate form) sporadic tax benefits. The particular way your firm is set up will determine the legal form of your company and the advantages you seek to gain from it.
Let’s look at a few advantages that this business structure provides.
1. Business Security And Perpetuity
When transferring ownership and sustaining a business over the long term, corporations, whose ownership is based on a proportion of stock ownership, give significantly more flexibility than other business forms.
Check our guide on Sole Proprietorship Vs LLC: What’s Best For Your Business?
Ownership of this business structure is frequently simple to acquire and sell, while specifics surrounding the transfer of ownership rely on the controlling agreement in the bylaws and articles of incorporation. For instance, an owner can simply sell off their stock if they desire to leave a business. Similar to this, a deceased owner’s stock ownership can readily pass to a new owner. Read our guide on How to Open a Company in USA as a Foreigner?
2. Tax Benefits
Despite the fact that some corporate forms (C corporations) are liable to double taxation, other corporate structures (S corporations), depending on how their income is divided, may offer tax advantages. S corporations, for instance, have the luxury of dividing their revenue between the company and shareholders so that it can be taxed at various rates. The remaining business earnings will be taxed at their own rate, while any income identified as owner remuneration would be subject to self-employment tax.
3. Personal Liability Protection
More than almost any other business form, a corporation protects its owners’ personal assets from liabilities. For instance, even if a corporation doesn’t have enough assets to cover its debts, its owners are not held legally or personally liable in the event of a lawsuit. One of the primary justifications for firms choosing to incorporate is personal liability protection.
4. Access To Capital
Although the publically traded stock is how most firms sell ownership, they can quickly raise money by selling stock. Other company kinds do not have this luxury of finance access. It is excellent for business expansion as well as for preventing a company from going bankrupt when necessary.
5. Transferable Ownership
Corporations have unlimited life and can exist forever. The company will remain to exist and be able to conduct business even if the individual owner passes away or decides to sell their portion of the corporation. Furthermore, ownership can be transferred. S corporations are subject to specific limitations, but in general, owners are free to transfer their ownership interests to some other person or company.
By registering as a corporation, you can increase the credibility of your company from the perspective of:
- Prospective Clients
A lot of traders are also reluctant to work with businesses that do not have corporation or LLC registration because there is no liability insurance, which increases the danger to the investors’ money. Therefore, becoming a corporation may also increase your credibility in the eyes of investors. Moreover, companies sell shares to raise money.
Disadvantages Of Starting A Corporation
While corporations can provide a number of advantages, there are a few drawbacks prospective owners should take into account.
1. Lengthy Application Process
The procedure of incorporating can be lengthy overall, however, filing your articles of organization with your secretary of state can be rapid. To accurately ascertain and record the specifics of the company and its ownership, you may need to comb through a lot of documentation. Sweeney cited the necessity to establish a board of directors, design and maintain corporate bylaws, create a shareholders ownership change agreement, issue company shares, and record meeting minutes as a few examples.
2. Double Taxation
The majority of corporations, including C-corporations, are subject to double taxation, which implies that the corporate level, as well as the shareholder level, are both taxed on company profits. Operating as an S corporation is the only way to get around this. By simply paying each shareholder on their individual income and not at the entity level, S-corps solve this issue. However, if S-corps’ records don’t comply with the law, the IRS has been known to start paying more attention to them and possibly tax them as C-corps.
3. Expensive To Form
The creation and maintenance of corporations are costly. While creating and sustaining a corporation might be expensive, it may be simple for established firms to generate funds by selling shares. A lot of beginning capital will probably be required to get a corporation up and running, in exchange for paying the filing fees, continuing fees, and higher taxes. Consult an attorney and an accountant who are knowledgeable about the ramifications of forming a company while comparing the benefits and drawbacks to decide whether a corporation is the best legal structure for your business.
4. More Complicated Tax Compliance
A corporation is a distinct taxable entity. To reduce the effects of double taxation of your income at the corporate level and when it is transmitted only to you as dividends or wages, sound tax guidance is necessary.
Steps On How To Start A Corporation
You’ve already done the planning and the research. You have now decided to set up your company as a corporation. So where do you even begin? What actions are required of you? Here is the step-by-step guide for forming a corporation provided below.
1. Choose A Business Name
One of the most crucial initial steps to take, aside from agreeing to form your firm as a corporation, is choosing the appropriate name. Make sure the name you choose doesn’t sound too much like another company or brand that already exists. To find out if your name is available, you can check with your community government offices or apply an online search tool. Also Read, How To Register Business Name Online?
- The name cannot be the same as a corporation with the same name already registered with the company registrar.
- A corporate designator, such as “Corporation,” “Incorporated,” “Limited,” or an acronym of one of these phrases, must be used as the name’s final component (Corp., Inc., or Ltd.).
- The name must contain certain words, such as Bank, Cooperative, Federal, National, United States, or Reserve, that imply a connection to the federal government or a specific type of business. Check 8 Best Banks for Small Business in 2022
Additionally, you should confirm that the trademark or service mark is accessible to the U.S. Patent and Trademark Office (USPTO) if you intend to operate a business under the name of your corporation. If you need assistance with the trademarking procedure, you should think about speaking with a lawyer or getting legal counsel. Also Read, How To Open a US Bank Account Online for Non-Residents?
Also, you should determine if the domain name connected to your preferred business name is still available. Check local directories to determine if any other companies are already using the same or a name that sounds pretty similar.
2. Register A DBA (Optional)
Some companies want to operate under a name other than the one listed in their articles of incorporation. You must additionally register a DBA (doing business as) name if you fit this description. This enables you to maintain the corporate identity’s separation from your business name. This is also known as a trading name, assumed name, or fictitious name.
The laws governing DBA names can change depending on the location. Make sure your DBA name complies with all legal requirements by checking with the Secretary of State’s office in your state.
3. Set Up Organizational Details
Owners frequently appoint directors while founding a corporation. Directors may be chosen by the owners themselves or by third parties. A director is responsible for formulating and amending operating bylaws. They also oversee the appointment and dismissal of corporate officers.
You can then choose a share structure and overarching strategy from there. Based on percentages, shares are divided into various ownership stakes in your corporation. They may also be divided into classes with various rights and benefits.
A statement from the incorporator must also be written. This comprises the initial directors who are appointed, along with their names and addresses. And a business records book is where all of that data is kept.
4. File Articles of Incorporation
The articles of incorporation must next be completed and submitted to the Secretary of State’s office in your state. You will do this to make your firm a legitimate business organization. When forming a corporation, you must have an article or certificate of incorporation. There can be separate rules to adhere to based on where you are.
Usually, articles of incorporation contain the following:
- Name and location of the company
- Aim and objective of the Corporation
- Contact information for the registered agent
- Type and quantity of stock shares to be issued
The person named as your corporation’s point of contact is the registered agent. On your company’s behalf, they will outline the benefits of process notices, official communications, and papers pertaining to compliance. Articles of incorporation may also be referred to as a certificate of formation or an incorporation certificate, depending on your state. Check our guide on Best Registered Agent Services Online.
5. Create Your Corporate Bylaws
The corporation’s internal rules and regulations are known as its bylaws (which are similar to an operating agreement for an LLC). Some states do not need bylaws for corporations. Adopting corporate bylaws, however, is advisable as they outline the duties and rights of the shareholders, directors, and officials of your company, removing any uncertainty and upholding corporate formalities. In order to verify the legality of the corporation before issuing loans or allowing your corporation to create accounts, banks and creditors may also request to view your corporate bylaws.
Even though the state does not require the filing of these bylaws, they are a crucial component of the incorporation procedure. To ensure that nothing is missed when drafting business bylaws, it can be beneficial to get legal advice.
6. Obtain An Employer Identification Number (EIN)
You must register your company with the Secretary of State as well as the IRS, the state, and any local tax authorities. Check our guide on What is an EIN And How Can It Help Your Business?
You must get an EIN (employer identification number), commonly referred to as a tax ID, in order to achieve this. This number is available straight from the IRS. As you file your articles of incorporation and complete the business formation procedure, it is simpler to simply obtain it through your online incorporation provider.
7. Issue Stock
When you put up your first administrative information, you would have included information on how your shares could be divided. They are divided into shares, each of which represents a certain proportion of ownership in the corporation. You must issue authorized shares now that the required articles of incorporation have been submitted.
You can achieve this in a few different ways. While some firms provide paper stock certificates, others issue and track the shares using electronic ledgers. You must keep track of who owns them, how many are issued, and how many are still accessible as a corporation.
It’s crucial to note the following when issuing stock:
- Who bought the shares?
- Amount of shares purchased
- The price of the shares
- When they purchased the stock
8. Draft A Shareholders’ Agreement
A shareholders agreement, though optional, can significantly boost your company’s long-term profitability.
A small business’s shareholders enter into a contract known as a shareholders agreement. It establishes how ownership will be handled in the event that a shareholder passes away, retires, becomes disabled, or quits the business. A shareholders’ agreement can assist assure business continuity and prevent future disputes if it is signed early on in the life of your firm. It is best to seek assistance from a qualified small business attorney who can modify the shareholders’ agreement to meet the unique requirements of your organization.
Most shareholder agreements include:
- Regulations for issuing new stock shares
- Limitations on the transfer of shares
- Share, ownership proportion, and valuation
- Regulations for conflicting interests
- Dispute settlement
- How to proceed if a shareholder passes away or becomes incapable
- The agreement needs to be written formally and distributed to all shareholders.
9. Get Any Licensing Requirements And Register for Tax
When it comes to your legal authority, you will have a number of business certifications and licenses. They differ based on your area and the sector you work in, but they might be necessary. To find out precisely what you require for the public record, get in touch with your local or state government. They can also inform you of any tax advantages for corporations.
For items like payroll, sales, and any other taxes, you will also need to enroll with state and municipal tax authorities. And there is a significant difference between being taxed as a C corporation vs an S corporation for federal tax reasons.
The licenses and permits needed will be based on your:
- Local and Regional Legislation
- Both State And Federal Legislation
- Your Respective Sector
10. File Any Necessary IRS Forms
A company’s employer identification number must be obtained (EIN). You will use this number, which functions as the company’s equivalent of a Social Security number, to open bank accounts for your business and to file your corporate taxes. It typically takes 30 days to file by mail, however, you may apply for an EIN online and get a number almost instantly.
11. Open A Corporate Bank Account
Opening a business bank account is a critical step in the incorporation process. This will assist shield your personal savings from any corporate liabilities because this fund will be different from the owners’ personal bank accounts. To assist our clients in opening business checking accounts, ZenBusiness partners with Bank of America.
To understand more about the specifics and paperwork required for this, get in touch with your bank. Your articles of incorporation and Employee Identification Number are usually required by banks. Also, check our guide On How To Open A US Bank Account As a Non-Resident.
What Are The Next Steps Of Starting A Corporation?
The first board meeting and board appointment should happen when the incorporation process is complete. This initial meeting must go over essential matters including choosing officers and figuring out your tax situation.
Ensure that the minutes of your company meetings contain a formal record of your board meetings. You should also have a look at our ranking of the top legal services available online. This tool is essential if your company wants to swiftly access contracts or legal documents during board meetings. It’s also a great tool if you really need to change your corporation’s bylaws legally.
Forming A Corporation (State-by-State)
It is normal for the incorporation process to differ slightly from state to state, whether it be due to incorporation fees, differences in tax legislation, or variations in document names. The incorporation procedures in the following states differ significantly from one another.
Due to its helpful regulations for business owners, Delaware is a well-liked state to incorporate in. You don’t need to be a resident of Delaware to incorporate there. This enables residents of other states to take advantage of Delaware’s advantageous tax policies for businesses.
In order to incorporate in Georgia, you must issue a notice of your intention to do so in the area where your office will be situated. This procedure must be started within one business day of submitting your articles of incorporation, and it must be published once every week for two weeks commencing within ten days of the newspaper receiving the notice.
In order to continue operating as a corporation in Florida, you need to file an annual report. By May 1, you must submit this assessment report.
A Statement of Information must also be submitted when incorporating a corporation in California. Within 90 days of filing your articles of incorporation, you must file this document. The details in your articles of incorporation are also contained in this form.
In Nebraska, you must additionally give detailed information of incorporation in a newspaper that is legally published in the same county as the corporate office.
The following information must be included in the public notice:
- The name of your business
- The total amount of shares that can be issued
- The location of the corporation’s agent and registered office
- Each incorporator’s name and address
After submitting your articles of incorporation to the Nebraska Secretary of State, this procedure is required.
6. New Mexico
The New Mexico Corporate Initial Report must be submitted in order to formally register your corporation in New Mexico. When you receive your certificate of incorporation from the New Mexico Secretary of State, you have 30 days to file it.
When submitting your articles of incorporation in Nevada, more paperwork is needed. The Nevada Initial List of Directors and Business License Application must also be submitted.
8. South Carolina
Additionally, you must submit the Initial Annual Report of Corporations if you are a corporation in South Carolina. Along with your articles of incorporation, this supplementary document needs to be submitted to the South Carolina Department of Revenue.
A certificate of formation must be submitted to the Secretary of State in Texas in order to incorporate. The corporation becomes official after this certificate and the associated filing fee have been submitted.
Within 120 days of the date of incorporation, you must submit the Washington Initial Report in order to become incorporated in Washington. This report may also be submitted with your articles of incorporation.
11. New Mexico
The New Mexico Corporate Initial Report must be submitted in order to formally register your corporation in New Mexico. When you receive your certificate of incorporation from the New Mexico Secretary of State, you have 30 days to file it.
You must submit the Domestic For-Profit Corporation Charter in order to formally establish a corporation in Tennessee. This document will formally register your company as a corporation, similar to articles of incorporation. The Secretary of State for Tennessee must get a copy of this paper.
You have 30 days from the date of your Missouri corporation registration to submit the Missouri Annual Report.
When determining which business form is best for you, be attentive. Selecting the proper ratio of corporate advantages and legal protection that meets your unique needs is crucial.
Despite their complexity, corporations are strong structures designed to foster unrestricted growth and uphold a lasting legacy. Incorporation is an exciting and significant milestone in your entrepreneurial path if you have huge plans for your small business.
Even though incorporation may be a difficult procedure, there are lots of advantages. The corporate requirements must be met if you choose this business structure in order to preserve the company citizenship and liability protection.
Ready to form your corporation? If you have any questions, let me know in the comment section below.
Frequently Asked Questions(FAQs)
1. How long does it take to become a corporation?
Your business is officially incorporated as soon as your articles of incorporation are submitted to the secretary of state. Even while it might only take a few minutes to complete the articles of incorporation form, it might take weeks or even months to compile all the paperwork required to submit the articles of incorporation.
2. How much does it cost to set up a corporation?
The cost of submitting articles of incorporation varies from $50 to $300, but the total cost of setting up a corporation depends on the state you choose to incorporate in and the kind of organisation you require.
3. Can just one person form a corporation?
Yes. Even if you are the only owner, you can still start a corporation, but to maintain compliance, you must conform to all the same company rules.
4. Can a corporation transfer ownership?
Yes. You can opt to sell share to another person even if the business’s owner dies or decides to sell their ownership interest.
5. Is it required of my corporation to draft corporate bylaws?
It differs. It’s crucial to check with the local secretary of state’s office in the state where you intend to conduct business because some states do not need your corporation to have corporate bylaws.