Start a Corporation

What is a corporation?

What exactly is a corporation? At its core, a corporation is a legal entity created by individuals — referred to as stockholders or shareholders — to conduct business. Unlike some other business structures, corporations are distinct from the individuals who establish and operate them. This separation means the corporation itself can own assets, enter contracts, sue and be sued, and even possess its own credit ratings.Key components of a corporation include its board of directors who make high-level decisions and the shareholders who invest their money in the company and, in return, get a say in some of these decisions. When you incorporate a business, you’re creating a legal “person” that exists independently, carrying its own set of rights and obligations.

Why should a business owner incorporate?

Incorporating your business is a pivotal step, but why do so many entrepreneurs choose this path? From safeguarding personal assets to attracting investors, incorporating provides several advantages that can set your business up for long-term success. Here’s a closer look at some compelling reasons.

Legal Protection

One of the most significant benefits of learning how to incorporate is the legal protection it offers. When you incorporate your business, there’s a clear divide between your personal assets and the business’s assets. This means if your corporation faces a lawsuit or incurs debt, your personal assets like your home, car, or personal savings generally aren’t at risk. This layer of protection is often called the “corporate veil,” and it helps ensure that business owners can pursue their entrepreneurial dreams without jeopardizing their personal wealth.

Enhanced Credibility

Want to make a strong impression? Incorporation can help. When a business becomes a corporation, it often gains an enhanced level of credibility among potential customers, clients, vendors, and partners. Seeing “Inc.” or “Corp.” after a business name can instill a sense of trust and professionalism. This perceived stability can make others more inclined to do business with you, potentially giving you a competitive edge in the marketplace.

Ability to Raise Capital

Corporations have the unique ability to raise capital by issuing shares of stock. Whether you’re eyeing expansion, looking to launch a new product, or aiming to invest in cutting-edge technology, selling stock can provide the funds you need.

This isn’t just about money — attracting shareholders also means bringing in individuals who believe in your vision and offer their support as you steer your business toward greater heights. Incorporating unlocks these opportunities, making it simpler to secure the resources your corporation needs to thrive.

Now let’s discuss how to get incorporated. Follow these steps, and you’ll be well on your way to forming a corporation. 

Step 1: Choose a business name for your corporation

Decide what you’ll call your corporation. Picking the perfect name for your corporation often requires a blend of creativity and diligence. The business name you choose is crucial, as it not only establishes your brand identity but also helps you stand out in the business world. It’s essential that your corporation’s name is unique to prevent potential legal hurdles and avoid confusion among customers.

Before getting too attached to a name, check its availability in your state. Most states offer online databases where you can do this. Remember, each state has its guidelines for naming corporations — often, they require the inclusion of terms like “Incorporated,” “Corporation,” or their abbreviations. Beyond state considerations, it’s wise to search the U.S. Patent and Trademark Office’s (USPTO) online database to ensure your chosen name doesn’t infringe on federal trademarks.Finally, see if you can get a matching domain name for your business website. A matching name helps customers easily find you online. And, if you want any DBAs (“doing business as” names), you should look into registering those, too.

Step 2: Appoint a registered agent

Designate a registered agent. Every corporation needs a registered agent — no exceptions. A registered agent serves as the official contact for your corporation, responsible for receiving some crucial communications (particularly service of process). The agent can be an individual or a business entity, and they must be available during regular business hours and have a physical address in the state where the business is incorporated.If you’re concerned about privacy or won’t be consistently available at a single address, using a registered agent service like ours can be a smart move. A registered agent service offers reliability, helping ensure that all important documents are received and forwarded to you promptly. In addition, your registered agent receives service of process, so it’s best to outsource this role unless you’re okay with the risk of being served with a lawsuit in front of clients, partners, or employees.

Step 3: File the Articles of Incorporation with your Secretary of State

File your incorporation documents. Jumpstarting your corporation’s legal journey involves filing the Articles of Incorporation. Think of this document as your corporation’s birth certificate. It provides essential information about your business, including the corporation’s name, its purpose, details about shares of stock, and the name and address of your registered agent. Depending on your state, additional information might be required.

Once you’ve drafted your Articles of Incorporation, you’ll need to file it with your Secretary of State’s office, accompanied by a filing fee. While most states allow online submissions, others might require a hard copy. As you move forward, keep a copy of the filed Articles for your records, as it’s a cornerstone document for your corporation.

Step 4: Hold your first meeting and choose directors for your corporation

Set up your board of directors at your initial meeting. Once your corporation is officially recognized, it’s time for the inaugural organizational meeting — a significant step that sets the stage for your corporation’s operations. At this meeting, one of the first orders of business is selecting the board of directors. This group of initial directors will wield significant influence, making high-level decisions and setting the corporation’s course. The process of choosing directors varies, but it’s typically driven by the corporation’s initial investors.It’s crucial to document everything in this meeting, from the selection of the directors to other foundational decisions. These minutes serve as an official record — an essential part of your corporate records — and can be referenced in future meetings or decisions. Remember, once directors are chosen, their roles and responsibilities should be clearly outlined to help ensure a smooth operational transition for the corporation.

Step 5: Create corporate bylaws and a shareholder agreement

Write the governing documents for your corporation. Corporate bylaws are like your corporation’s rulebook. They lay the groundwork for how your corporation will operate, from defining the roles of officers to outlining meeting procedures and more. Bylaws cover the everyday inner workings of your corporation and can help resolve disputes or questions about protocols down the line.

While they’re internal documents and typically don’t need to be publicly filed, having them in place is crucial. They help ensure consistency and order as your business grows and evolves. In a way, they’re similar to an LLC’s operating agreement, but they’re even more detailed and vital.

A shareholder agreement, on the other hand, is like a prenuptial agreement for your corporation’s owners. It dictates the rights and responsibilities of the shareholders and provides clarity on matters like profit distribution, ownership transfers, and actions to take in the event of a shareholder’s death or exit.

Crafting this document might require careful negotiation, but it’s a safety net. It helps ensure that all shareholders are on the same page and have a clear understanding of their roles and expectations within the corporation.

Step 6: Issue stock certificates

Set up your corporation’s stock certificates. Issuing stock certificates is a tangible way to represent ownership in your corporation. When someone invests in your corporation, whether they’re buying a share for the first time or acquiring more, they’re typically given a stock certificate.

This piece of paper symbolizes their slice of the corporation’s pie. It’s a historical practice, and in today’s digital age, many corporations also maintain electronic records of stock ownership. However, for some shareholders, having a physical certificate can feel like a genuine stamp of ownership.

The process of issuing stock differs between private and public companies. In private corporations, stock is often distributed among a small group of initial investors or founders, and the transfer of these stocks is typically more restricted.

Public companies, conversely, have their stock available to the general public on the stock market. For them, stock certificates might be more symbolic, with most trading and ownership records kept electronically. Regardless of your corporation’s type, maintaining meticulous records of stock ownership is paramount to help ensure clarity and transparency.

Step 7: Apply for an EIN for your corporation

Get an Employer Identification Number. Every corporation, just like an individual, needs a unique identifier when dealing with the U.S. federal government, especially for tax purposes. This identifier is known as an Employer Identification Number (EIN), often referred to as a federal tax ID. Think of it as your corporation’s Social Security number.Whether you’re planning to hire employees, open a business bank account, or simply file taxes, an EIN is indispensable and legally required. The Internal Revenue Service (IRS) allows you to apply for an EIN online, and in most cases, you’ll receive it almost instantly. If the digital realm isn’t your preference, you can also apply via mail or fax. If you’d rather avoid the hassle of getting your own number, use our convenient EIN service.

Step 8: Obtain necessary business licenses and permits

Get your required business licenses and permits. Starting a corporation goes beyond just paperwork — you also need the green light to operate legally within your industry and locality. This is where business licenses and permits come into play. Depending on your corporation’s nature and location, the required permits can vary. Some licenses you might need include a general business license, a sales tax permit, or health department permits for businesses dealing with food.

Then, there are lots of potential industry-specific licenses, such as those for real estate agents or barbers. To ensure you’re fully compliant, start by checking with your local city or county business office. They’ll guide you on local requirements. Simultaneously, consult your state’s official website for state-level licenses and permits.

While this step might feel cumbersome, it’s crucial. Operating without the necessary licenses can lead to financial penalties, or worse, having your business shut down. Remember, staying compliant is an ongoing process, as licenses and permits often have renewal dates.If you’re feeling overwhelmed by the prospect of researching your licenses and permits, let us help. Our business license report assembles a list of the licenses and permits that apply to your unique corporation, freeing you up to focus on running your company.

Post-Incorporation Steps

Getting your corporation off the ground is just the start. Continuous maintenance helps ensure its smooth operation and compliance with legal requirements.

Maintaining Corporate Compliance

Corporations have ongoing state requirements like filing annual reports and franchise tax payments, depending on your state. It’s essential to stay updated to avoid penalties, maintain good standing, and prevent the dissolution of your corporation. Set calendar reminders for all crucial annual report dates and periodically check for any changes in state regulations. Our Worry-Free Compliance service can help you stay up to date.

Holding Regular Corporate Meetings

Regular corporate meetings, usually annual, are often legally mandated. They inform shareholders, aid in decision-making, and help ensure the corporation’s alignment with its bylaws. It’s not only about holding these meetings but also diligently documenting their minutes to maintain transparency and a clear record of the corporation’s trajectory.

Keeping Accurate Corporate Records

Proper documentation is vital for a corporation. From financials to board decisions, up-to-date records support informed decisions and are invaluable during audits or potential business sales. Store all essential documents securely and review them periodically. Accurate records not only help fend off challenges but also provide a clear snapshot of your corporation’s health.

Pros and Cons of Incorporation

Corporations, like all business structures, come with strengths and weaknesses. While they offer several benefits, they also have certain complexities that might not suit every entrepreneur. Let’s examine the pros and cons to help you determine if incorporation is right for you.

Advantages

Corporations shine when it comes to benefits like legal protection. Incorporating a business creates a distinct legal entity, shielding the personal assets of owners from potential business debts or liabilities. This limited liability protection is quite different from the unlimited personal liability of a sole proprietorship or general partnership. Another standout advantage is the ability to raise capital by selling shares. This feature often makes it easier for corporations to secure investments or financing, propelling growth and expansion.

Disadvantages

However, the corporate structure isn’t without its challenges. To start, there’s the financial aspect — setting up and maintaining a corporation can be costlier than other business entities. There’s also the issue of double taxation for C corporations, where profits get taxed at the corporate level and again on shareholders’ personal tax returns.

Furthermore, corporations require adherence to numerous formalities, such as regular meetings and record-keeping. The management structure is also more rigid than an LLC, which can be a deterrent for those seeking flexibility. Lastly, the amount of paperwork and regulatory oversight can be daunting, adding an administrative burden that not all small business owners wish to shoulder.

Incorporating a business begins with selecting a unique name and appointing a registered agent. Essential steps include filing the Articles of Incorporation, setting bylaws, issuing stock, and obtaining an EIN. Once established, continuous maintenance involves compliance, regular meetings, and accurate record-keeping.

Types of Corporations​

Before you start a corporation, it’s important to know these three common corporations and their use cases: 

• C corporation
• S corporation
• Nonprofit corporation

C Corporation​

A C corporation (C corp) is a type of corporate structure that offers the strongest legal protection to its owners. Registering a C corp is the most common way to form a corporation. Follow the steps below as we walk you through starting a corp.

Filing as a C corporation is a legal procedure that allows corporations to profit and be taxed accordingly. Although C corporations protect their owners from personal liability, they need extensive record-keeping, reporting, and operational processes. Not familiar with C corps? See a full C corp definition.

Advantages and Disadvantages of a C Corporation Formation

If you want to raise money for your business concept and sell shares to investors, you’ll want to incorporate as a C corporation.

C Corp Advantages

• Limited liability: You are generally not responsible for the debts of the corporation. If someone sues the corporation, they usually can’t go after the personal assets of the shareholders.
• Ability to issue shares: Your corporation can sell shares to investors to raise money.
• Unlimited number of investors: This is important for growth.
• Unlimited classes of shares: Issuing classes of non-voting or limited voting shares allows you to keep control of the corporation.
• Ability to go public: You can become a public corporation, selling shares in the stock markets.

C Corp Disadvantages

• Higher cost: The corporation is more expensive to maintain and administer because compliance with regulations means keeping extensive records.
• Double taxation: Corporation income is taxed at the corporate rate, and dividends issued to shareholders are taxed at the individual income tax rate.
• Losses are not deductible: Business losses can’t be deducted from owner/shareholder income.

If the pros and cons don’t help you decide how to incorporate, do more research on sites such as ZenBusiness. If you’re sure you need a C corporation, then you should start the incorporating process.

Ready to start a C corp? We offer fast, reliable formation, and we’ll set up a C corp for you. We’ll also help you start, run and grow your business over time.

Shareholders’ Relation to the C Corporation

C corporations are structured so that if a shareholder decides to leave the company and/or sell their shares, it can remain undisturbed. The lives of shareholders and the corporation are completely independent of each other. Because of this structure, C corporations are a great choice for medium- to high-risk businesses or businesses that plan to be sold or “go public.”

Nonprofit Corporation​

A nonprofit corporation is designed to do charitable, religious, educational, literary, or scientific work. Nonprofit corporations work for the public and can receive tax-exempt status, which means they do not pay state or federal taxes for any income or profits.

In addition to following rules that are very similar to a C corporation, they also follow a special set of rules about what to do with any profits.

S Corporation​

An S corporation (S corp) is not a business entity. It’s a tax selection that you can make as a corporation or LLC. It is designed to avoid the double taxation issues of C corporations. Taxes can be passed directly through the owners’ personal income, avoiding corporate tax rates. Most states recognize S corps the same way that the federal government does and tax shareholders according to those laws. 

S-Corps are not all taxed the same

Since each state can set its own laws for corporations, not all S corps are equally taxed. For example, some states do not recognize S corporations, taxing them like C corporations. In other cases, certain states might tax S corporations in profits above a specified limit.

Start your corporation today with expert help

We offer low-cost services and expert support to help form your corporation and remain compliant with state and federal laws. Our plans are affordable and can help you eliminate any first-time business difficulties. We’ve helped over 500,000 customers form their dream business.