What Documents Are Required to Start a Corporation?

Forming a corporation in the United States involves a series of steps and specific documentation. This article aims to provide a detailed guide on the necessary documents, the advantages and disadvantages of choosing a corporation over other business structures, and the taxation aspects of corporations.

Understanding Corporations

A corporation is a legal entity that is separate from its owners, providing limited liability protection to its shareholders. This means that the personal assets of the shareholders are protected from the corporation's liabilities and debts. Corporations are often chosen by businesses that plan to raise capital from investors, go public, or establish a more complex business structure.

Types of Corporations

1. C Corporation (C Corp): This is the most common type of corporation, subject to corporate income tax.
2. S Corporation (S Corp): This type of corporation allows profits to be passed directly to shareholders, avoiding double taxation.
3. Nonprofit Corporation: Organized for charitable, educational, religious, or other purposes, and can apply for tax-exempt status.

Essential Documents for Forming a Corporation

1. Articles of Incorporation

Definition: The Articles of Incorporation, also known as a Certificate of Incorporation or Corporate Charter, is the primary document that officially creates a corporation. This document is filed with the Secretary of State or a similar regulatory agency in the state where the corporation is being established. It serves as the charter that legitimizes the corporation's existence.

Contents:

• Name of the Corporation: The corporation's name must be unique and distinguishable from other entities already registered in the state. It should include a corporate designator such as "Inc.," "Corp.," or "Incorporated."
• Principal Place of Business: This is the physical address where the corporation's main office is located. It is essential for legal and official correspondence.
• Purpose of the Corporation: A brief description of the corporation's business activities. Many states allow for a general purpose clause like "to engage in any lawful business for which corporations may be organized."
• Duration: If the corporation is not intended to exist perpetually, the articles must specify the duration of its existence.
• Registered Agent: A designated individual or entity located within the state to receive service of process and other legal documents on behalf of the corporation.
• Incorporator Information: The names and addresses of the individuals responsible for forming the corporation. These incorporators sign the Articles of Incorporation.
• Stock Information: Details about the corporation's stock structure, including the number of shares authorized to be issued, types of stock (common or preferred), and the par value of shares.

2. Bylaws

Definition: Bylaws are a set of internal rules that govern the management and operation of the corporation. These outline the duties and responsibilities of directors, officers, and shareholders, and set procedures for corporate activities. Bylaws are not filed with the state but are essential for the corporation's internal functioning.

Contents:

• Board of Directors: Rules about the roles, responsibilities, and procedures for electing and removing directors, as well as their powers and duties.
• Meetings: Guidelines for holding annual and special meetings of shareholders and directors, including notice requirements, quorum, and voting procedures.
• Officers: Titles, duties, and election procedures for corporate officers such as the president, vice president, secretary, and treasurer.
• Shareholders: Rights and responsibilities of shareholders, including voting rights, dividend distribution, and procedures for shareholder meetings.
• Committees: The formation and operation of committees within the board of directors, such as audit or compensation committees.

3. Organizational Meeting Minutes

Definition: The first official meeting of the corporation’s board of directors, where initial actions are taken to establish the corporation formally.

Contents:

• Approval of Bylaws: Formal adoption of the corporation's bylaws.
• Election of Officers: Appointment of the initial officers of the corporation.
• Issuance of Stock: Authorization and issuance of shares to the initial shareholders.
• Bank Accounts: Resolution to open corporate bank accounts.
• Other Business: Any additional initial business activities, such as appointing a registered agent, authorizing leases, contracts, or other foundational decisions.

4. Stock Certificates

Definition: Physical or electronic documents that certify ownership of a specific number of shares in the corporation.

Contents:

• Corporate Name: The name of the corporation issuing the shares.
• Stockholder Name: The name of the shareholder receiving the shares.
• Number of Shares: The exact number of shares owned by the shareholder.
• Class of Stock: The type of stock being issued (e.g., common or preferred).
• Signature: The certificate must be signed by corporate officers, typically the president and secretary, to be valid.

5. Shareholder Agreement

Definition: A legally binding agreement among the corporation's shareholders that outlines their rights, responsibilities, and the relationship between the shareholders and the corporation.

Contents:

• Transfer Restrictions: Rules regarding the sale or transfer of shares to ensure control over who becomes a shareholder.
• Buy-Sell Provisions: Conditions under which shares can be bought or sold, including rights of first refusal and other mechanisms to manage ownership changes.
• Voting Rights: Procedures and rights of shareholders to vote on corporate matters, ensuring clarity in decision-making processes.
• Dispute Resolution: Methods for resolving disputes among shareholders, such as mediation or arbitration clauses.

6. Employer Identification Number (EIN)

Definition: A unique identification number assigned by the Internal Revenue Service (IRS) for tax purposes.

Contents:

• Application Form SS-4: A completed form submitted to the IRS to obtain the EIN, which is required for tax filings, opening bank accounts, and hiring employees.

7. Business Licenses and Permits

Definition: Various licenses and permits required to legally operate the corporation in its specific industry and location.

Contents:

• State and Local Licenses: Specific licenses required based on the business's activities and its geographical location.
• Professional Licenses: Required for certain professions, such as legal, medical, or architectural, depending on the business's nature.

Pros and Cons of Selecting a Corporation

Pros

• Limited Liability: Protects shareholders from personal liability for corporate debts and obligations.
• Capital Raising: Easier to raise capital through the sale of stock to investors.
• Perpetual Existence: The corporation continues to exist even if ownership changes.
• Transferability of Ownership: Shares can be easily bought, sold, or transferred.
• Credibility: Incorporation can enhance the business’s credibility with customers, suppliers, and investors.

Cons

• Cost: Incorporating can be expensive due to filing fees, legal fees, and ongoing compliance costs.
• Complexity: More regulatory requirements and formalities compared to other business structures.
• Double Taxation: C Corporations are taxed at both the corporate level and the individual level on dividends.
• Regulatory Oversight: Increased scrutiny and reporting requirements from regulatory bodies.
• Reduced Control: Shareholders have a say in corporate governance, which can dilute the control of the original founders.

Comparing the Pros and Cons of Selecting a Corporation Alongside Other Business Structures

Sole Proprietorship

Pros

• Simple to Form and Operate: Sole proprietorships are the easiest and least expensive business structure to establish. There are minimal legal requirements and paperwork.
• Complete Control: The owner has total control over all business decisions and operations.
• Pass-Through Taxation: Business income is reported on the owner's personal tax return, and taxes are paid at the individual rate, avoiding double taxation.

Cons

• Unlimited Personal Liability: The owner is personally liable for all business debts and obligations. Personal assets can be at risk.
• Difficult to Raise Capital: Sole proprietorships may find it challenging to secure funding since they cannot issue stock and may be seen as higher risk by lenders.
• Limited Lifespan: The business is tied to the owner's lifespan and can cease to exist upon the owner’s death or decision to close the business.

Partnership

Pros

• Simple to Form: Partnerships are relatively easy and inexpensive to establish, with minimal regulatory requirements.
• Pass-Through Taxation: Like sole proprietorships, partnerships benefit from pass-through taxation, where business income is reported on the partners' personal tax returns.
• Shared Decision-Making and Responsibilities: Partnerships allow for shared management and the pooling of resources and expertise from multiple partners.

Cons:

• Unlimited Personal Liability for General Partners: General partners are personally liable for business debts and obligations. However, limited partners' liability is restricted to their investment.
• Potential for Disputes: Differences in opinion or conflicts between partners can lead to disputes and affect business operations.
• Shared Profits: Profits must be shared among partners as per the partnership agreement, which may lead to disagreements.

Limited Liability Company (LLC)

Pros

• Limited Liability Protection: Owners (members) are generally not personally liable for business debts and liabilities. Their risk is limited to their investment in the LLC.
• Pass-Through Taxation: By default, LLCs enjoy pass-through taxation, though they can choose to be taxed as a corporation if it is more beneficial.
• Flexible Management Structure: LLCs offer flexibility in management and operational structure, with fewer formal requirements than corporations.

Cons:

• More Complex than Sole Proprietorships and Partnerships: While simpler than corporations, LLCs still require more paperwork and compliance than sole proprietorships or partnerships.
• State-Specific Filing Fees and Requirements: LLCs must comply with state-specific regulations, which can involve filing fees and ongoing compliance costs.
• Limited Ability to Raise Capital: LLCs may find it harder to raise capital compared to corporations, as they cannot issue stock and may be perceived as less established.

Corporation

Pros

• Limited Liability: Shareholders are protected from personal liability for corporate debts and obligations, with their risk limited to their investment in the corporation.
• Capital Raising: Corporations can raise significant capital by issuing stock to investors, which is advantageous for growth and expansion.
• Perpetual Existence: Corporations continue to exist independently of the owners' status, providing continuity and stability.
• Transferability of Ownership: Shares of stock can be easily bought, sold, or transferred, facilitating ownership changes without affecting the corporation’s operations.
• Credibility: Incorporation can enhance the business’s credibility with customers, suppliers, and investors, often viewed as a sign of stability and permanence.

Cons:

• Cost: Incorporating involves higher costs due to filing fees, legal fees, and ongoing compliance costs such as annual reports and franchise taxes.
• Complexity: Corporations have more regulatory requirements and formalities, including maintaining corporate records, holding regular meetings, and complying with reporting obligations.
• Double Taxation: C Corporations face double taxation where profits are taxed at the corporate level, and dividends distributed to shareholders are taxed again at the individual level.
• Regulatory Oversight: Increased scrutiny and reporting requirements from regulatory bodies can add to the administrative burden.
• Reduced Control: Shareholders have a say in corporate governance, which can dilute the control of the original founders.

Taxation of Corporations

C Corporation Taxation

1. Corporate Income Tax: C Corporations are taxed on their profits at the corporate tax rate.
2. Double Taxation: When profits are distributed as dividends, they are taxed again at the individual shareholder level.
3. Deductions and Credits: C Corporations can deduct business expenses and may qualify for various tax credits.

S Corporation Taxation

1. Pass-Through Taxation: Profits and losses are passed through to shareholders and reported on their individual tax returns, avoiding double taxation.
2. Qualification Requirements: Must meet specific IRS requirements, including a limit on the number of shareholders (100 or fewer) and the types of shareholders (must be individuals, certain trusts, and estates).
3. Reasonable Compensation: Shareholders who are also employees must be paid a reasonable salary, which is subject to employment taxes.

Conclusion

Forming a corporation in the United States involves a well-defined process and specific documentation. While corporations offer significant advantages such as limited liability and ease of raising capital, they also come with increased complexity and costs. Understanding the necessary documents and the pros and cons of incorporating can help business owners make informed decisions about the best structure for their business. Additionally, comprehending the taxation implications is crucial for financial planning and compliance. By carefully considering these factors, entrepreneurs can choose the most suitable business structure to achieve their goals and ensure long-term success.