Starting a corporation is often an obvious choice for many entrepreneurs who are looking to grow their business, enjoy various tax benefits, gain more control over pivotal business decisions, and enjoy personal liability protection. This complete guide outlines what a corporation is, how to start a corporation, and answers some frequently asked questions about the entire process.
What is a corporation?
A corporation is a legal entity which is distinct from its shareholders and can exist indefinitely until dissolution. Since a corporation is considered a single entity, not associated with owners or directors, there is limited liability for its shareholders. Moreover, a corporation introduces stock options for shareholders.
Not only does this allow shareholders to profit from the business through stock appreciation and dividends, but it also introduces easy ownership transfer through the sale of stock.
How to start a corporation
When you decide to incorporate, there’s plenty to do which can be overwhelming. Below are the 10 first steps on how to create a corporation, from choosing a business type to obtaining the necessary licenses and permits.
1. What corporation type is right for you?
The first item on the table when starting a corporation is choosing the right corporation type for your business needs. There are two main types that you can choose from: C Corporation (C Corp) and S Corporation (S Corp). While these corporations are similar in most ways, they differ when it comes to how they are taxed.
A C Corp is the most traditional type of corporation, and one of its main benefits is that it is taxed at the entity level. However, this means that there is double taxation, with the entity itself, and shareholders being taxed.
Contrastingly, an S Corp has pass-through taxation, meaning profits and losses pass-through directors to shareholders who then pay taxes on any income and losses during the financial year.
2. Decide which state you want to incorporate in
After choosing a corporation type, it’s time to decide where in the U.S. you want to incorporate. Each state offers different benefits for businesses so it’s important to do your research and choose the right location for your company. Whether you decide to start a corporation in California or incorporate in Delaware, the team at Corporate Creations can help across all 50 states.
3. Reserve a business name
You’ve decided upon the most important matters; now it’s time to choose a business name. The company name should accurately reflect your business and brand but also be unique. A great way to ensure you obtain your desired company name is to run a business name search and reservation online.
4. Organize key business requirements
After you’ve reserved a business name, you can shift your focus to some pressing business matters that must be completed during the incorporation process:
- Get a registered agent: There’s no way around this step since a registered agent is a legal requirement across all 50 U.S. states. You need a registered agent to receive legal documents like Service of Process on your behalf. You can appoint anyone to be your registered
- Issue shares: Issuing shares is an important part of starting a corporation. Most corporations just issue common stock, which is a legal requirement. Common stock grants shareholders equity in the company, and many states have a minimum number of common shares that a business must issue.
- Get an incorporator: The incorporator is the individuals who will sign the Articles of Incorporation and file with the Secretary of State.
5. File Articles of Incorporation
The most important part of the corporation registration filing is the Articles of Incorporation. As part of the corporation paperwork, you’ll need to file the Articles of Incorporation which contain essential information such as the company’s official name, business address, share information, registered agent details, and incorporator details. You may also need to provide director information and addresses.
Once filed, it can take a few days or weeks for the Secretary of State to review the documents; assuming there are no issues, your company will be officially incorporated.
6. Draft corporate bylaws
Now that you’re incorporated, it’s time to draft your corporate bylaws. Bylaws can be a legal requirement depending on the state in which you incorporate and outline the internal company rules, offering guidance on how the corporation will operate on a day-to-day basis. Within the bylaws, you’ll set out meeting guidelines, voting rules and procedures for electing directors, and election protocols. Moreover, you’ll establish a framework that all directors and shareholders can refer to and follow,which in turn prevents conflicts from arising regarding the company’s operations.
7. Hold the first board meeting
Once you’ve drafted the corporate bylaws, it’s time to hold the first board meeting and get the bylaws approved. During this meeting, not only should the bylaws get implemented, but key roles, such as chairman of the board, will be appointed. The first board meeting is also a good time to formalize any open-ended decisions, and formally establish the business direction, ensuring all directors are aligned.
8. Get an EIN
As a tax-paying entity, you’ll need to acquire a Federal Employer Tax ID number (also known as a FEIN or EIN). With a FEIN, you’ll be able to easily file taxes with the IRS, open corporate bank accounts, and hire employees.9. Get a business license (and additional permits)
When you set up a corporation, you need to ensure you have the correct licenses and/or permits that allow you to carry out your business activities. Once you have your FEIN, you’ll be able to apply for the necessary licenses; for example, if you incorporate in Nevada, then you’ll need to obtain the State Business License alongside any additional occupational permits.
10. Set up taxation
Starting a corporation means registering for state and local taxes and obtaining tax ID numbers from the IRS and your local state revenue agency to ensure you pay the right amount of tax.
11. Open a bank account
It’s a legal requirement to open a corporate bank account under your company’s official name. Not only does this ensure you comply with business regulations, but it provides you with financial protection and helps you build a credit status which can assist in obtaining loans in the future.
How to incorporate a business that stays compliant
Now you understand how to start a corporation, it’s important to ensure it remains compliant with all local state regulations. Noncompliance can affect your good standing, reputation, and ability to carry out business.
Although compliance requirements differ state-by-state, as a general rule of thumb you should keep on top of the following:
- Annual report filing deadlines
- Tax requirements
- Corporate governance (board meetings, stock transfers etc.)
By following the above steps on incorporation and maintaining compliance with state regulations, you can successfully establish and operate a business, built on a solid foundation for growth and sustainability.
Frequently asked questions
Yes. Many states now allow you to file digitally, meaning you can minimize paperwork and streamline the entire process.
Yes, you can set up a corporation in a state different to the one in which you live. Entrepreneurs often opt to do this so that they have more freedom in choosing a state that operates business-friendly laws.
No, corporations in the U.S. are taxed differently based on a few factors including the corporation type and the state of incorporation. For examples, C Corporations are subject to federal corporate income tax, but S Corporations are not.
Starting a nonprofit corporation is similar to setting up a regular corporation. However, there are a few additional steps to take such as applying for tax exemption and registering for fundraising.
Entrepreneurs encounter various challenges when setting up their businesses. One of the most common is securing sufficient capital to cover initial set up costs as well as ensuring all necessary paperwork is completed. Additionally, navigating compliance regulations, such as appointing a registered agent and incorporator, is essential. Finding skilled employees and managers can also be challenging as you build a team to help your business grow and thrive.
There is no best time to start your business; it largely depends on factors such as your personal readiness and financial situation. Most business owners consider market conditions and the time of year when deciding to incorporate. Starting a business at the beginning of the tax year is common as it avoids the holiday season when filing times may be longer and key stakeholders are out of office.
