Starting a new business is exciting. And knowing how to form a corporation will give your business journey a fantastic start. A corporation is a legal entity that is separate from its owners. Whether you want to save money on taxes, attract investors, protect yourself, or boost reputability, starting a corporation is the next best step for you and your business. Corporate business entities have their own tax life, laws, life cycle, and care instructions. It is a responsibility, but the ability to incorporate is the right of any United States citizen.
There are 11 ways to form a corporation.
- Select a company name: Your name represents your business, so choose one that is memorable and appropriate.
- Create a DBA: Fictitious names allow you to conduct business under a different name if you prefer that option.
- Nominate directors: A board of directors is needed to form a corporation. Aim to have at least 3-4 members.
- Submit your articles of incorporation: Articles of incorporation allow you to establish your corporation. Each state has certain requirements for filing them, so make sure you know what to do.
- Construct corporate bylaws: Keep bylaws as simple as possible so you do not have to make so many changes in the future. They are key to your corporation’s operations.
- Create a shareholder contract: Shareholder contracts list the rights and obligations of each shareholder, how shares are sold, and how the company will run.
- Organize the first board of directors meeting: Without this initial meeting, the corporation can fall into disarray and miscommunication can ensue.
- Release stock: Release stock so you can start issuing and distributing it to investors.
- Get licenses and permits for your business: Getting licenses and permits enables you to maintain your corporation.
- Register your business: Register your business and ensure you gain the appropriate tax ID numbers for tax season.
- Create a business bank account: Create a business bank account to separate and protect your personal funds from any business liabilities.
1. Select a company name
Select a company name to form a corporation. In most states, you must submit a corporate designation or word that identifies your business as a corporation. Two examples of corporate designations are Incorporated (Inc.) and Corporation (Co.). When naming a business, the goal is to pick a name that describes your business, is memorable, will not be rejected by your state, and will not cause legal issues later. In addition, ensure your name choice does not infringe on any existing trademarks. A trademark search can help determine whether your name is available.
2. Create a DBA
If you want to conduct business under a name different from your chosen corporate name, you may need to create a DBA. A DBA allows you to keep the identity of your corporation separate from your business name, which is an advantage. Fictitious names are known as DBA (Doing Business As), Assumed names, and Trade names. Laws concerning DBAs vary depending on which area you reside. You can check with your state’s Secretary of State Office to guarantee your DBA name meets all legal guidelines.
3. Nominate Directors
Owners often nominate directors for a board when forming a corporation. Owners can appoint themselves or others to serve on the board. The director’s responsibilities include governing the corporation, managing the business and affairs, electing corporate officers, and attending corporate meetings. Check with your state to know the minimum number of board members needed. To be safe, three people serving as directors is a good number. Also, keep in mind the long-term commitment of the individuals you pick to your company’s success. And gauge whether their knowledge and skills are beneficial to the corporation.
4. Submit your Articles of Incorporation
You must submit your articles of incorporation to your state’s Secretary of State Office. This step allows you to create your corporation officially. You can decide whether to file yourself or hire a service. If you are working with a lawyer, they may offer to file for you. Since the documents are easy to complete and not very long, you do not need to worry about submitting articles of incorporation. Articles of incorporation typically include the name and address of the corporation, the purpose, name, and address of the registered agent, and the type and number of shares of stock to be issued.
5. Construct Corporate Bylaws
It is important to construct corporate bylaws for your corporation, but it may appear easier than it actually is to do. Since it takes lots of effort to edit bylaws, keeping them as simple as legally possible is beneficial. Writing the minimum amount to comply with your state’s requirements is a great idea. The purpose of bylaws is to break down your business’s basic procedures and operations. They include data such as the company’s name and location, responsibilities, and members of the board of directors, and the distribution of shares. Bylaws do not have to be filed with the state, but they are a huge part of the incorporation process.
6. Create a shareholder contract
You should create a shareholder contract to help protect the interests of any remaining shareholders in case certain events occur. The contract will be used in the event of an owner’s death or if an owner transfers ownership of their shares. It is optional, but a shareholder contract is a great document to have for unexpected scenarios. A business attorney can help draft this document if you need assistance. Also, a shareholder contract must state the maximum number of directors that can reside on the board at any time.
7. Organize the first Board of Directors meeting
Regardless of how many directors your corporation has, it is important to organize the first board of directors meeting. If you do not hold the initial meeting, the board can lack direction or clarification that helps them make clear decisions about the corporation. The initial board of directors meeting should address the adoption of corporate bylaws, the appointment of corporate officers, and authorization to issue stock. Also, if you want to elect S corporation status, you should discuss this at the initial meeting to gain approval. Record the minutes of the meeting and put them in a record book.
8. Release Stock
When you finance a corporation, it is beneficial to release stock. After the board of directors authorizes the issuance of stock, you can begin issuing and distributing stock to investors. When releasing stock, it is vital to record who purchased the shares, how many shares they bought, how much the shares cost, and when they bought the shares. Stock is generally released as a physical certificate or in the form of digital shares. Stock is issued to establish which people have a certain amount of ownership stake in a company.
9. Get licenses and permits for your business.
Before you do business as a corporation, getting licenses and permits for your business is important. The permits and licenses depending on your city and county laws, state government and federal laws, and your specific industry. When you begin the application process, check out your state’s requirements to be aware of deadlines and other important information. If you are unsure about certain things, consult with your lawyer to ensure you are complying with all regulatory requirements. Having these two things can help you maintain your corporation.
10. Register your Business
Register your business. Since corporations are separate taxpaying entities, you need to obtain certain tax ID numbers to guarantee you are paying the appropriate taxes. You will likely need tax ID numbers from the Internal Revenue Service (IRS) and your state revenue agency. Depending on which state you do business in and your corporation type, the taxation your corporation could endure varies. You can visit the IRS website for the most up-to-date information about the taxation of corporations.
11. Create a Business Bank Account
Create a business bank account. This is a crucial step in forming a corporation since it will protect your personal funds from any business liabilities. The account is separate from the bank accounts of business owners. Check with the bank to determine what documents are required. Some examples of required documentation are corporate resolution, articles of incorporation, and employer identification number (EIN).
What is a Corporation?
A corporation is a type of legal body created for a particular purpose. It is separate and distinct from its owners while possessing some of the same rights and responsibilities as individuals. A corporation can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. One of the important elements of a corporation is limited liability. Limited liability means that its shareholders are not personally responsible for the company’s debts.
How do I Pick a Good Corporation Name?
You may have lots of creative ideas for a business name. But naming your business is more involved than thinking of an appealing name. A good name represents your business’s identity and goals. It also helps you market yourself and avoid legal trouble. A business name will be with you for a long time, so carefully consider your choice before investing in a business entity.
You can pick a good corporation name by following these steps.
- First, follow Your State’s Naming Guidelines. When forming a corporation or limited liability company, your state’s laws will limit you from using another business name entity in your state that is currently in use. You can find your state’s naming guidelines on the state agency website that handles business filings. Most states enable you to reach registered business names online to see if the name you want is available.
- Second, avoid picking a similar name to another corporation. When searching for a unique name, be mindful of competitors using names similar to the one you want. Avoid business names that could confuse your business with another. The worst thing that could happen is the other business accuses you of trademark infringement. You could face a lawsuit, but you should still have your own brand and identity, even if that does not happen.
- Third, be memorable but not too unique. You should be able to get trademark protection for your business name. For small businesses, that can be tricky. Generic or geographical names might attract customers, but they cannot get trademark protection. Anything such as “Great Plumbers” or “Chicago Pizza” Will make it difficult to gain protection. Find a unique and creative name that still describes your business quality.
- Fourth, do not limit yourself. A business may choose names that match the town they are located (ex., Cleveland Garden Care). But, suppose the business wants to expand to Akron. The city moniker does not fit and may drive customers away. The same logic applies to services. If you are too specific, you will wind up with an inappropriate name as soon as you expand your offerings. Ensure that your name allows you to grow and change.
How Can a Corporation Be Registered?
A corporation can be registered, which means you are creating a separate legal entity from a business’s shareholders (owners). Owners of a corporation have limited liability protection from business debts and obligations. Registering a business as a corporation requires the company to file the appropriate documentation with the Secretary of State’s office where the business resides. Also, new corporations must gain state and local licenses and permits to operate. Some states will require you to file online, while others will have your file paper documents in person or through the mail.
Here is how you register a corporation.
- First, select a state to incorporate the business. In many instances, businesses will incorporate the state where most of their business transactions occur. But, states like Nevada, Delaware, and Wyoming act as popular states to incorporate companies based on the favorable tax treatment of businesses in those states.
- Second, create a name for the organization. Most states require that a corporate name differs from any entity registered or held on reserve in the state. Corporations must include words like “incorporation,” “limited,” “company,” or “corporation.”
- Third, file articles of incorporation with the Secretary of State’s Office. Articles of incorporation include data such as the name and address of a business and the name and address of the corporation’s resident agent.
- Fourth, create written bylaws for the business for reference in the future. Numerous states do not require corporations to file corporate bylaws with the state. However, written bylaws establish the rules and regulations that will govern the corporation.
- Fifth, acquire the licenses and permits you need to operate the corporation legally. Most states require corporations to obtain a general business license to function in the state. The permits and licenses needed will vary based on the nature of the business.
What are the Articles of Incorporation Composed of?
Articles of incorporation are formal documents filed with a government body, and they legally document the creation of a corporation. Articles of incorporation usually have pertinent information like the firm’s name, street address, agent for service of process, and the amount of stock to be issued. In the United States, articles of incorporation are filed with the Office of the Secretary of State. Usually, this occurs when the business decides to incorporate. By filing these documents, corporations may gain favorable tax advantages, the ability to issue stock and raise capital, or shield owners from liability.
Articles of incorporation are mainly used outside of companies. However, other documents such as bylaws, operating agreements, or business plans are more helpful internally. Corporations must take certain steps and make decisions required under corporate law. And filing articles of incorporation is part of the process. The articles of incorporation are composed of the following items.
- Name of the corporation: The corporation name is the legal name. It is your corporation’s identity, and you have to use it in all documentation.
- Name and address of the registered agent: The registered agent must have a physical address on file. They accept tax and legal documents on behalf of your business.
- Type of corporate structure: The three most common types of corporate structures are a limited liability company (LLC), C-Corporation (C-Corp), and S-Corporation (S-Corp).
- Names and addresses of the initial board of directors: The board of directors makes decisions for the company. All of their names and addresses should be filed for contact purposes.
- Number and type of authorized shares: Authorized shares are the total number of shares that companies can afford to give out. The types of authorized shares are common shares, preferred shares, and restricted shares.
- Duration of the corporation: The duration indicates the length of time (in years) that your corporation will operate. Most states will not ask for a set duration period in the articles of incorporation. But states that request it will not ask you to provide a limited duration.
- Name, signature, and address of the incorporator: Incorporators are the owners of a business. Once a corporation is established and able to operate, the name, signature, and address of the incorporator are crucial for daily functions.
How Many People Should be a Member of a Corporation?
A corporation is a group of people with the authority to act as a single entity. In many states, a sole owner may fill all the requirements to form a corporation. At a minimum, a corporation should aim to have three to four people, but a single person can fulfill multiple roles in a business. The standard roles are president, vice president, secretary, and treasurer. A single owner may hold all of a company’s shares and vote unanimously on all business matters.
What is a Shareholder Agreement?
A shareholders’ agreement is a contract that governs how the shareholders and the corporation interact. It details how the company will operate, the rights and obligations afforded to shareholders, and the relationship between the company and shareholders. The purpose of a shareholder agreement is to guarantee shareholders are protected and treated fairly. Also, it enables them to make decisions about third parties who may become shareholders in the future. A shareholder agreement is more important to minority shareholders since it outlines the majority shareholders’ obligation to protect minority shareholders from abuse and give them a voice in key decisions.
How to Issue Corporate Stock?
Issuing corporate stock is not hard if done correctly. When you have proper share structure and procedures, issuing shares in a corporation is straightforward. Corporations tend to attract investors faster than any other business entity available. This attraction is due to the protection and structure that corporations offer. However, issuing corporate stock for the first time can be confusing. You can issue corporate stock by following five steps. First, decide how much capital to raise. Determine how much money you want to make by selling stock. Stocks give you some choice in how much money to raise, unlike loans. For loans, the bank, or lender dictates how much money you receive. Next, decide how many shares to issue. The number of shares your corporation can issue is listed in your articles of incorporation. If you want to issue more shares than allowed, you can file an amendment to change it. The number of shares you can issue equals the number of shareholders you will have, but some individuals may buy multiple shares.
Third, set the value of each share. The easiest way to set the value of each share is by dividing the amount of money you want to raise by the number of shares you will issue. But remember, the value per share can impact the number of votes one shareholder can have. Also, the share’s value can affect how much control you have in a corporation. Then, determine whether your corporation will be public or private. There are two types of corporations (public and private). Both issue stock but not in the same capacity. Private corporations cannot issue as many stocks as public ones since private shares can only be sold to the corporation’s owners. Meanwhile, public corporations allow a limitless number of shares. Registration can be a hassle, but it helps protect corporations and the general public.
Lastly, choose what kinds of stock your corporation will issue. The final decision to make is what kinds of stock you want to offer. If you have a C corporation, you have the authority to issue multiple classes of stock. But S corporations can only have one stock. The two most popular types are common growth and preferred stock. Corporations can issue other stocks along with common growth and preferred stocks, but these two are the most common options.
Is it Simple to Form a Corporation?
It is not simple to form a corporation. In fact, forming a corporation can be complex. You start by filing paperwork with your state’s Secretary of State. Along with several legal steps, you will likely need to pay filing fees at the time of application and every year from now on. But as long as you follow legal and financial requirements, you can start a corporation.