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How to Start a Corporation

Corporations are unique legal and economical bodies. In the eyes of the law, corporations exist as entities separate from any individual person, and yet at the same time, are recognized by law for being a legal “person.” They have an unlimited life span, and shareholders who own stock in the company are not liable for corporate debts. As such, more and more people are opting to start a corporation to protect the business owner from personal liability and tax implications.

Starting a corporation is complicated, but with diligent research and good business practices, you can turn this endeavor into an easily accomplishable milestone. Below are 7 steps to guide you through how to form a corporation.

Step #1: Decide What Type of Corporation You Need

The first thing you will need to do is to determine what type of business corporation you want to start. There are two types to choose from: C vs S Corporation.

  • C Corporation – C corporation or C corp is usually a large entity that needs the tax benefits and protection offered by limited liability. They are taxed on earnings at corporate levels before distributing profits to shareholders (who are then taxed individually). 
  • S Corporation – S corporation or S corp is a smaller entity formed to avoid double taxation. Business income is reported directly on shareholders’ tax returns without also being taxed at a corporate level. There are limits on size for an S corp (100 shareholders max) but otherwise, they are subject to the same requirements and protections of C corporations. 

Additionally, you will need to designate a purpose for your corporation. All corporations need a purpose, which can be any type of business activity, such as:

  • Sales 
  • Marketing 
  • Finance
  • Accounting
  • Customer Service
  • Human Resources

Step #2: Decide What State to Incorporate In

There is no requirement to file for incorporation in the same state you live in.

When deciding which state to set as your corporate base, research state laws to find out which state will work best for your corporation. Many states require businesses to submit articles of incorporation, pay registration or filing fee, and periodically submit required reports with the Secretary of State’s office. 

Other requirements may include applying for federal tax identification numbers (S Corp Tax ID or C Corp EIN) and obtaining licenses or other permits. 

Remember it’s not necessarily a benefit to just find the easiest route to incorporation. You’ll also want to consider: 

  • The cost to incorporate
  • State business tax rates
  • State laws related to operating your business

Step #3: Name Your Corporation

While you won’t need to pour through baby name books for a new bundle of joy (although, it may be inspiring), naming your corporation is still an exciting and important step in how to form a corporation. 

Quick Tip: Complete a search of corporate names to avoid future trademark issues before you register your corporate name and address.

Step #4: Choose a Board of Directors to Govern Your Corporation

A board of directors is a group of individuals that oversees the management and operations of a corporation. They are responsible for the oversight of major decisions, including:

  • Strategic direction
  • Major investments
  • Hiring/firing of senior executives

Most corporations have boards that are made up of outside directors that are appointed by the shareholders in addition to inside directors who are on the company’s payroll.

Step #4: Write the Bylaws for How Your Corporation Will Be Governed

Corporate bylaws are a set of rules that govern the internal affairs of a corporation. They detail how the company should be managed and what its responsibilities are to its shareholders. Some of the decisions usually reflected in the corporation’s bylaws are: 

  • The company’s corporate structure
  • How directors are elected
  • What happens when the company is sold
  • Protocol for when someone dies

Not every state requires bylaws, but this is an example of something that will serve you well even if it’s optional. Banks and lenders may want to see your corporation’s bylaws as part of ensuring your corporation is legit.

Step #5: Share the Wealth

How will your shareholders get paid? Corporations can issue either preferred or common stock. Start by selecting the best option for your company:

  • Preferred stock – This type of stock does not give your corporation’s stakeholders voting rights when making decisions in regard to the future of the company. However, preferred stakeholders are paid dividends with priority to the company’s income.
  • Common stock – Unlike preferred stakeholders, common stakeholders do have voting rights in the corporation’s operations. However, they’re paid last, behind creditors, bondholders, and preferred stakeholders

Once you’ve chosen the type of stock you wish to implement, generate a shareholders agreement. 

This is a document that provides a framework for the rights and responsibilities of shareholders of your company. It also outlines the relationship between shareholders and directors, and how to terminate their relationship.

Step #6: Appoint a Registered Agent

Many states require a registered agent or corporate officer, with a business license and a physical address within the state, to file articles of incorporation.

A registered agent service (or registered corporate agent) is a person who has been appointed by the company to receive service of process. This means that if someone wants to sue the company, they can serve the registered agent or corporate officer with a summons and complaint, and the registered agent will then serve the company.

Step #6: File Your Articles of Incorporation

Finally, you (or your registered agent) can file the articles of incorporation with the state to be granted the legal right to do business. These articles typically require:

  • Name of the corporation
  • Name and address of the registered agent
  • Type of corporate structure your corporation will follow
  • Names and addresses of your board of directors
  • Amount (and type) of authorized shares
  • Duration of the corporation (if there is an end date)
  • Name, signature, and address of the incorporator (the person establishing the corporation)

Generally, this also includes paperwork filed with the Secretary of State and a filing fee—again, the cost and complication level depend on what state you selected as your corporate base.

Step #7: Go Forth and Prosper! (Plus More Paperwork…)

After filing articles of incorporation, you will need to file an initial list of shareholders and directors. You will also need to file annual reports in most states. These reports will be provided to stakeholders and should outline the operations and finances of the business. 

Apply Online

Knowing how to start a corporation is a complicated process. You will also have to consider the advantages and disadvantages of a corporation. Luckily, there are resources to help you get to the finish line. To avoid having to set up a corporation in person, simply fill out this form to apply for a corporation online right now.

Sources: 

The Balance Small Business. Seven Steps to Starting Your Own Corporation. https://www.thebalancesmb.com/start-your-own-corporation-2951253

Wolters Kluwer. Starting a corporation. https://www.wolterskluwer.com/en/expert-insights/starting-a-corporation

The Blueprint. 14 Steps to Start a Corporation. https://www.fool.com/the-blueprint/how-to-start-a-corporation/

Business News Daily. 6 Steps to Becoming a Corporation. https://www.businessnewsdaily.com/15793-how-to-become-a-corporation.html

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