How To Start a Corporation
Launching your own business is a thrilling adventure. For many entrepreneurs, choosing the right business structure for their new business is crucial. You might consider a sole proprietorship or general partnership. You may also consider a limited liability company (LLC) or a corporation. Depending on the type of business structure, this will impact your personal liability and how you pay your taxes.
Of all business entities, corporations are the most complicated to set up and maintain. However, they can also provide business owners with the most protection for their personal assets. Corporations also have a significant ability to raise funds and other advantages as well.
This article guides small business owners through the steps to start a corporation. This guide aims to help ensure you begin your business legally and effectively. Keep in mind that your startup's requirements might vary from the list below. Check the requirements in your specific state.
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1. Decide on a Business Name
Your corporation's name represents its identity. Choosing a winning name for your business can be tricky. It should reflect your business activities and be appealing to your target audience. Remember, your chosen name should neither be misleading nor too similar to an existing name.
Keep in mind that your state may need your corporate name to include an identifying word such as "incorporated" or "limited." They might also require "corporation" or an abbreviation of such a term. While brainstorming, consider checking the Small Business Administration's Business Guide for guidance.
2. Search Name Availability
Before finalizing your corporation's name, search to see if it's available. Government agencies offer databases where you can check for similar names. A unique name avoids legal issues and confusion with other businesses. Besides searching for references to your corporation's chosen business name, you also should look for similarities to existing names. If your name is too similar to an existing name to the point that it could confuse customers, you may not be able to register it.
3. Register Your Corporation's Name
Once you've chosen a unique name, you must register it. Registering your corporation's name is a pivotal step in establishing your business's unique identity. By securing your corporation's name, you not only protect your brand but also prevent future legal disputes. Registration typically involves a search for name availability. A formal application with a relevant state agency follows this.
Once registered, it affirms your exclusive right to use your business name for business purposes in your region. This is often referred to as “doing business as" (DBA) or “trade name." In essence, this step solidifies your business's presence and lays the foundation for building its reputation and brand in the market.
4. Pick a Place in Which To Incorporate
The location where you incorporate impacts your tax rate and the legal documents required when taxes are due. Each state has its own business rules. Research where it's most beneficial for your corporate income and business plan. Even if your company's primary operations are in one state, you may incorporate in another if it provides advantages. For instance, a significant number of businesses are incorporated in Delaware despite being founded or operated elsewhere.
5. Choose Directors for Your Corporation
Directors play a pivotal role in corporate governance. They're responsible for major decisions and guide the company's direction. The board of directors handles overseeing the operation and protection of the interests of investors and shareholders. Directors may be officers of the corporation, investors, or individuals with no other stake in the company. Choose individuals who support your vision and bring diverse skills.
6. Create and File Your Articles of Incorporation
The articles of incorporation are filed with your secretary of state's office. They serve as the official charter for your corporation. These are essential legal documents detailing your corporation's basic information. They're submitted to a government agency for recognition. Typically, they include details like the corporation's purpose and shares of stock issued. They might also include the registered agent's information.
Filing these articles is a mandatory step in the incorporation process. This provides the legal basis for the entity's existence and operations. Keep in mind that you will need to pay a filing fee. Once approved, your corporation is officially recognized by the state.
7. Write Your Corporate Bylaws
Corporate bylaws are internal documents that govern the operations and management of a corporation. The bylaws outline responsibilities, such as the purpose of the corporation and who manages the business. Bylaws define the corporation's internal structure and operations. They address topics like board meetings, voting processes, and roles.
Although not always required by law, bylaws offer a roadmap for corporate governance. Essentially, they serve as a corporation's operating manual, ensuring clarity and consistency in its internal affairs.
8. Create a Shareholder Agreement
If your corporation has many shareholders, draft an agreement outlining each person's rights and responsibilities. This agreement is a shareholder buyout agreement. It can detail profit distribution, roles, and decision-making procedures. It's not always necessary to create a shareholder agreement or stockholder agreement, but these documents address the rights and responsibilities of shareholders. This includes their share of ownership, terms, and valuation.
9. Elect S Corporation Tax Status (Optional)
There are specific tax differences between a C corporation and an S corporation that may be of interest to your business. For certain types of companies, S Corporation (S-corp) status avoids "double taxation" while retaining the liability protections of C Corporation (C-corp) status. With S-corps, there is no corporate tax. Instead, any gains pass through the corporate level and are assessed on the owners' personal income tax returns. This is “pass-through taxation," where profits are only taxed once.
10. Open a Separate Bank Account
Opening a separate bank account for a legal entity is a crucial step for business owners. By distinguishing the finances of the business from personal assets, owners can effectively minimize personal liability. This distinction ensures that the business's finances are not intertwined with personal expenses. This can be especially vital when it's time to pay taxes.
Whether you're engaged in self-employment or running a larger enterprise, having a dedicated bank account simplifies financial management. It also helps in accurate record-keeping.
To open a business bank account, an employer identification number (EIN) is often required by the Internal Revenue Service (IRS). This is the business's federal tax ID number, which is separate from your social security number. Sole proprietorships may simply use their social security number. The EIN is essential when handling employment tax and filing your annual report for taxes. Having a separate bank account also makes it easier to manage state tax obligations.
11. Start a Minute Book for Your Meetings
Starting a minute book is an essential organizational step for any business or group. A minute book serves as a centralized record of discussions, decisions, and actions taken during meetings. By maintaining this documentation, teams can ensure clarity and consistency. There is also accountability in the decision-making process.
The minute book acts as a historical reference, allowing members to revisit past meetings and track progress on various agenda items. Additionally, a well-kept minute book can provide legal protection by verifying proper procedures were followed. In essence, this tool is invaluable for fostering transparency and effective communication within any organization.
12. Hold Your First Board of Directors' Meeting
The first board of directors meeting is a critical event in the corporation's early life. It sets the tone for the company's governance and operational direction. This meeting will lay out the corporation's structure, vision, and goals.
During this inaugural gathering, directors typically ratify the corporate bylaws. They appoint officers and set the corporation's fiscal year. They discuss initial business strategies. It's an opportunity to formalize the foundation of the corporation and align with its vision and objectives.
13. Issue Certificates to Your Initial Stockholders
The corporation will need to issue stock certificates to initial stockholders. This is a formal way of recognizing and documenting their ownership in a corporation. These certificates represent the number of shares each stockholder owns and serve as tangible proof of equity, delineating the distribution of the company's ownership. By providing these certificates, corporations ensure transparency in their entity's structure. They offer stockholders a clear record of their stake in the business.
14. Get Business Licenses and Permits
Every corporation requires specific permits to operate legally. Check with local, state, and federal agencies. Learn more about the permits you might need, including those from:
See Starting a Business: License and Permit Checklist for a general overview.
15. Get Help in Starting Your Business
Many steps are straightforward, but legal complexities may arise. Consider consulting legal professionals to ensure everything is in order. Incorporating can be a long-term benefit to your business in the long run. To ensure your new company complies with legal requirements, you may wish to use a reputable DIY business formation service.
You may also wish to seek help from a legal professional. There are attorneys experienced in business incorporation and formation. They can help ensure your business meets the requirements of your jurisdiction.
Seek professional help from a local small business attorney.
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