How to Form a Corporation

A corporation structure comes with its benefits, but it also requires consideration. Choosing the right business structure impacts operations. How do you make sure a corporation is right for you?

Understanding all the factors is important. It helps in making an informed decision. This article will help you focus on the concept of a corporation. This will help you choose the right business type more easily.

What is a corporation?

A corporation is a legal entity separate from its owners. This structure provides limited liability protection. Corporations can enter contracts as a business unit, sue or be sued, and own assets. Public corporations offer shares to the general public, while private corporations restrict share ownership.

Characteristics of corporations include:

1. Separate legal identity
2. Limited liability for shareholders
3.Ability to raise capital by issuing shares
4. Perpetual existence
5. Transferable ownership
6. Centralized management

Corporations also operate with a structured hierarchy that has:

• Shareholders
• Directors
• Officers

The corporate structure offers flexibility. Shares can be easily transferred, allowing for changes in ownership without disrupting business operations. It also allows for different classes of stock.

Benefits of forming a corporation

What can you expect when you form a corporation? How is it different from a limited liability company? These are some of the reasons why people choose this way of doing business.

Limited liability protection

Corporate debts or legal issues don't typically affect personal finances. This protection encourages investment. It also reduces personal risk for small business owners. This liability protection extends to directors and officers too.

They can be held liable for certain actions. However, the corporate structure provides a level of personal asset protection for good-faith business decisions. That can be particularly helpful in high-risk industries like healthcare.

Potential tax advantages

Corporate tax structures allow for different strategies to manage tax liability. These can include timing of income recognition or strategic use of deductions. When done right, these options can reduce the tax burden. But it’s important to remember that all corporations don’t work the same way at tax time.

C corporations deal with double taxation. The corporation pays taxes on profits. Shareholders pay taxes on dividends. However, this structure allows for more flexible tax planning. On the flip side, S corps avoids double taxation. Profits pass through to shareholders.

Increased credibility

Corporations may appear more credible to potential clients and attract investors more easily. Their structure suggests stability. It can also contribute to relationships with suppliers and lead to better credit terms or pricing.

Perpetual existence

Corporations continue to exist regardless of ownership changes. For example, if an owner leaves or dies, the corporation continues. This perpetual existence allows for long-term contracts and commitments. It can make a difference in industries with long project timelines or ongoing client relationships.

Access to capital and talent

Corporations can issue stock. This makes raising capital simpler. For example, corporations can sell shares to raise funds. They can also use stock options to attract top talent. This flexibility in financing can support business growth.

The ability to issue different classes of stock provides more flexibility. It allows for creative financing structures. This may help you balance the different interests of all parties involved in your organization.

Faster growth

The corporate structure provides a framework for growth. For example, you can create separate divisions within the corporate structure. It powers diversification. All while allowing owners to maintain overall control.

How to set up a corporation

Now you know why corporations are a popular business type. Next, follow these steps to create a corporation of your own.

1. Choose a business name

Selecting a business name is no easy feat. The name must be unique. It should also comply with state regulations. For example, in California, to determine whether a proposed name is the same, deceptively similar to, substantially the same as, or distinguishable from an existing name:

• No distinction between upper and lower case letters, typeface, or font will be recognized.
• Accent marks above letters and other English language diacritics will not be recognized.
• Subscript or superscript characters will be treated as standard characters and will not appear above or below other characters in a business entity name.

To select a name for your corporation:

1. Conduct a name search
2. Check trademark databases
3. Verify domain name availability
4. Ensure compliance with state naming rules

When choosing a name, think about its long-term implications. Will it still be relevant as your business grows? Is it easy to remember? These factors can impact your marketing efforts and brand recognition over time.

2. Appoint directors

Corporations must appoint initial directors. These individuals oversee operations until the first board meeting.

Director responsibilities include:

• Setting company policies
• Making major business decisions
• Appointing officers
• Determining salaries
• Ensuring compliance with laws and regulations
• Representing shareholders' interests

When selecting directors, consider their specific skills and expertise. A well-rounded board might include individuals with both industry-specific and general business management experience. This diversity of skills can support better decision-making.

3. File Articles of Incorporation

Filing Articles of Incorporation makes the corporation official. Information you will need to file typically includes:

1. Corporation name
2. Business purpose
3. Number of authorized shares
4. Registered agent details
5. Incorporator information
6. Principal office address
7. Initial directors (in some states)

Additionally, beginning January 1, 2024, certain types of corporations and other similar entities created in or registered to do business in the United States must report information about their beneficial owners—the persons who ultimately own or control the company—to the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN).

All parts of your Articles of Incorporation become public record. They provide basic information about your corporation. Keep this in mind when deciding what to include. For example, you may choose to use a professional registered agent service. In that case, their details would become a part of that record.

Consider working with a lawyer to draft your Articles. This ensures compliance with state laws. It also helps avoid common mistakes. When drafting your Articles of Incorporation, consider future needs too.

For example, If you initially authorize 10,000 shares but only issue 1,000 to founders, you have room to issue more shares for future employees or investors. All without going through the amendment process. This can save time and money down the line.

4. Create corporate bylaws

Corporate bylaws govern how the corporation operates. Bylaws are typically internal documents that include:

• Number of directors
• Officer roles
• Stock issuance details
• Amendment procedures
• Fiscal year definition
• Indemnification provisions
• Conflict of interest policies

Well-drafted bylaws help prevent future conflicts. They provide clear guidelines. They also demonstrate a level of formality in the business This helps maintain limited liability protection. Consult a lawyer when drafting bylaws. This ensures compliance with state laws.

For example, your bylaws might specify that notice must be given to all shareholders at least 14 days before the meeting. This could include the date and agenda for the meeting. The bylaws might also outline voting procedures.

5. Hold a board of directors meeting

The first board members meeting sets the corporation in motion. Typical agenda items include:

1. Adopting bylaws
2. Appointing officers
3. Authorizing stock issuance
4. Setting the fiscal year
5. Adopting a corporate seal
6. Approving bank accounts
7. Ratifying pre-incorporation actions
8. Adopting initial corporate policies

Keep detailed minutes of this meeting. These become part of the corporate records. They demonstrate a commitment to the bylaws you set earlier. You may also consider using a meeting agenda template to keep the meeting on track.

6. Issue stock certificates

Issuing stock certificates distributes shares among initial shareholders. To complete this step, you’ll need to:

1. Determine share allocation
2. Create stock certificates
3. Record issuances in a stock ledger
4. Distribute certificates to shareholders

Maintain accurate records of all stock transactions. This includes initial issuances. It also covers any future transfers.

Stock certificates should include:

• Corporation name
• Number of shares issued
• Shareholder name
• Date of issuance
• Signature of authorized corporate officer
• Any transfer restrictions
• Stock certificate number

Some corporations opt for electronic stock certificates. This can simplify record-keeping. Check state laws regarding electronic certificates. Remember, issuing stock is a regulated activity. Consult with a securities lawyer if you're unsure about requirements.

7. Get licenses and permits

You may need specific paperwork to operate legally. Most areas require a business tax receipt. Some fields require professional business licenses. You need to make sure your business is operating in good standing

Research requirements at the federal, state, and local levels. Ensure compliance with all relevant regulations. Some industries, such as food service and healthcare, have specific licensing requirements. Check your industry-specific regulations.

For example, if you're opening a restaurant in New York City, you would need several licenses and permits. At the city level, you'd need a Food Service Establishment Permit from the Department of Health and Mental Hygiene. You'd also need a Food Protection Certificate. That requires at least one employee to complete a food safety course.

Not having the right documentation can result in penalties. If your business requires a license or permit, make a calendar for renewals. Some need to be updated yearly. Also, consider areas you may expand into in the future and the licenses that could be required.

8. Register for state and federal taxes

Proper tax registration is crucial. It ensures compliance with tax laws. Follow these steps to take some of the stress out of tax time.

Get an Employer Identification Number (EIN)

An Employer Identification Number (EIN) serves as the corporation's federal tax ID. This nine-digit number is essential for various business activities. The Internal Revenue Service (IRS) uses it to identify your new business entity.

Obtaining an EIN is a straightforward process. You can apply online through the IRS website. The application is free and can be completed quickly. Once approved, you'll receive your EIN immediately.

Remember, your EIN is sensitive information. Treat it with the same care as you would a Social Security number. Use it only when necessary for official business purposes. If your corporation's name, structure, or ownership changes, you may need to apply for a new EIN. Always keep your EIN information current with the IRS to avoid potential compliance issues.

Register for state taxes

After getting your federal EIN, the next step is registering for state taxes. State tax requirements vary widely, so research your specific state's rules. Most states require corporations to register for multiple types of taxes.

Many states offer online registration portals. Some states may require you to register with multiple agencies. For example, you might register for income tax with one department and employment taxes with another.

As your business grows or changes, you may need to register for additional taxes. Stay informed about your state's tax laws and any changes that might affect your corporation. Create a checklist of required registrations to ensure you don't miss any.

Set up payroll tax accounts

Setting up payroll tax accounts is crucial if your corporation plans to have employees. This process ensures you're prepared to withhold taxes from employee wages. Payroll taxes have strict deadlines. Regular review of your payroll processes can help catch and correct errors.

Determine tax year and accounting method

Choosing your corporation's tax year and accounting method is a big decision. It affects how you report corporate income and expenses. Most corporations use the calendar year. However, a fiscal year might be better for you, depending on your industry.

Next, consider your accounting method. Using the cash method. You report income when received and expenses when paid With the accrual method, you report income when earned and expenses when incurred

Consider your business type and cash flow patterns when making these decisions. Your choice can impact tax liability and financial reporting. Once you make your selection, you'll report it to the IRS on your first tax return.

9. Comply with ongoing requirements

Corporations face ongoing compliance obligations. These maintain the corporation's good standing. Regular requirements often include:

Filing annual reports

Filing deadlines vary by state. Some require filing on a specific date, while others base it on your incorporation date. Missing these deadlines can result in penalties or even administrative dissolution of your corporation.

Set up reminders for your annual report due dates. Consider assigning this task to a specific individual or department to ensure it gets done. This is essential for maintaining your corporation's good standing. It may also help you avoid legal issues.

Holding annual meetings

Most states require corporations to hold at least one shareholder meeting each year. These meetings provide a way for shareholders to use their voting rights. It also helps them stay informed about the state of the business.

Maintaining corporate records

Regularly update your records to reflect changes in ownership, or corporate structure. This includes recording stock transfers and any amendments to corporate documents. Keeping this information organized can protect your business.

For example, let's say your corporation initially issued 1,000 shares equally among four founders. Six months later, one founder decides to leave and sell their shares back to the company. You would need to document this transaction. You may also need to update shareholder agreements.

Paying required fees

Fee amounts and due dates vary by state and sometimes by the size or type of corporation. Consider setting up automatic payments for recurring fees where possible. This reduces the risk of overlooking payments.

Record all fee payments as well. These records can make all the difference if there's ever a dispute about your corporation's standing. They also help you report business expenses for tax purposes.

Updating registered agent information

Do you need to change your registered agent? Before officially making a switch, you'll need to properly notify your current registered agent. Check your service contract for specifics on termination. Most jurisdictions also have regulations around notifying the outgoing agent.

Follow the rules for this change in your location. In some cases, your outgoing registered agent may also require documentation, like an acknowledgment form. Complete any paperwork with them to finalize the termination

Maintaining proper capitalization

Undercapitalization can lead to "piercing the corporate veil.” In that case, courts may not consider the corporate entity. Instead, they hold shareholders personally liable for corporate debts.

To maintain capitalization:

• Regularly review your corporation's financial health
• Add capital when necessary to support operations
• Avoid using corporate funds for personal expenses
• Document all capital contributions and distributions

10. Observing corporate formalities

Educate all directors and employees about the importance of corporate formalities. Their consistency with these practices strengthens the corporation's legal standing. But it's not all about legal compliance.

It also promotes good governance. That can improve overall business operations. Regular review of your practices can help you make sure you’re taking the right steps. It can also help you find opportunities for improvement.

Cost of forming a corporation

Formation costs vary. They depend on several factors. Understanding these costs helps in budgeting.

Typical expenses include:

• State filing fees
• Legal fees
• Registered agent fees
• Licensing fees
• Name reservation fees
• Expedited processing fees
• Stock certificate printing

Budget for these expenses. Factor them into your startup costs. Remember, costs can vary significantly by state and industry. It’s important to understand what’s normal for your market and type of business.

Some entrepreneurs choose to handle formation themselves. This can reduce costs. However, it increases the risk of errors. To reduce that risk, consider using online incorporation services. They can provide you with more guidance than you’d get by self-filing.

Considering ongoing costs

Also, remember that formation is just the beginning. Budget for ongoing costs. These might include:

Amending articles of incorporation

Costs for amending Articles of Incorporation vary by state. However, the true cost often extends beyond the filing fee. Consider potential legal fees for drafting the amendment and any costs associated with implementing the changes. For example, updating marketing materials if you do a name change.

Qualifying to do business in other states

As your corporation expands, you may need to qualify to do business in states other than your state of incorporation. This process is necessary when a corporation conducts business activities in a state other than its home state.

Activities that often trigger this need in another state are:

• Having a physical presence
• Employing workers in the state
• Accepting orders or conducting sales
• Maintaining bank accounts

Consult with a business attorney to determine where qualification is necessary. Failing to qualify when required can result in penalties, such as fines and being barred from bringing lawsuits in that state.

Trademark registration

Trademark registration can be a valuable investment for protecting your corporation's brand identity. While common law trademark rights exist without registration, federal registration with the United States Patent and Trademark Office offers additional benefits.

Remember, trademark registration is not a one-time event. You'll need to file maintenance documents, use your trademark in commerce, and file certain documents at regular intervals to show that you're continuing to use your trademark.

If you don't file these documents before the deadline, your registration will be canceled or will expire, or your extension of protection to the U.S. will be invalidated. Also, factor enforcement costs into your budget.

Patent applications

If your corporation develops new inventions or processes, patent protection may be important. Patents provide exclusive rights to your invention for a limited time. This can help you gain and keep market share.

Note that not all inventions are patentable. Plus, not all patentable inventions are worth patenting from a business perspective. Assess the potential commercial value of your invention against the costs of the patent.

Employee benefit plans

Implementing employee benefit plans can help attract and retain talent. However, these plans come with costs and administrative responsibilities. Common employee benefits include:

• Health insurance
• Retirement plans
• Life and disability insurance
• Paid time off
• Wellness programs

Design your benefits package to balance attractiveness to employees with cost-effectiveness for the corporation. Regularly review and adjust your offerings to ensure they remain competitive. They should also align with your corporate goals and budget.

Budgeting for both initial and ongoing costs like these can support the corporation's financial stability and may also relieve the organization's leaders of stress. When you plan for costs in advance, you give yourself a runway to manage them.

Ready to start your corporation?

Forming a corporation is a multifaceted process that requires careful attention. But you can use the information in this post to kickstart your journey. Seek out professionals if you get stuck along the way. Lawyers and accountants can provide valuable guidance. Completing the process the right way will create a solid foundation for your business's future.