Are you looking to start a business in America and find a business entity that will grow with you?
Because corporations are a popular business option in America, many entrepreneurs form them.
What exactly is a corporation? And why is it so common?
This entity type gives entrepreneurs a formal business structure that allows them to expand their company. We’ll explain everything you need to know about how to form a corporation in your state.
What is a Corporation?
Corporations are a special entity type. They allow a group to run a business together while the entity enjoys corporate personhood which grants the corporation many of the same rights and privileges as a person.
A corporation is considered an individual by law. Individuals have the right to buy assets, sue or get sued, hire employees and many other rights. Corporations also have these rights.
Corporations have the unique ability to issue stock. Shares are not allowed to be issued by any other type of entity. Shareholders own these stocks. In essence, they hold a portion of the net worth of the company. Therefore, shareholders are the true owners of the corporation.
However, just because a person owns shares doesn’t make them a manager in the company. Voting shareholders can elect directors to the corporation. The board of directors, in turn, governs the corporation through the appointment of officers. These officers oversee the day-today operations of the company.
A corporation gives you a few legal protections. The corporation is legal separate from its members and is therefore an individual entity.
This distinction means that members are not liable for corporation debts unless the business was operated in an improper manner or if the owners have acted fraudulently. The corporation will not be affected by bankruptcy of a member.
What are the Steps to Form A Corporation?
It takes a lot of planning and time to form a corporation. You will also need to pay some registration fees. Before you rush to start the process, make sure you are certain that the corporation is right for you.
A corporation has the advantage over other entities in that it can raise money by issuing stock. It is important to realize that stockholders have the ability to vote and play a part in running the business. This means you are giving up some of your decision-making power. An LLC, or another type of entity, may be better if you wish to keep full control.
These steps will help you form your company once you have chosen a corporation.
1) Select a Name and Reserve It
The first step towards your success is to create the perfect name for your business. It is just as important as the business idea itself. Names must be unique and comply with legal requirements.
No matter where you are incorporated, your business name can’t be identical to a name claimed by another entity. It also can’t be similar to names that are already in use. Some words, such as “bank” and “insurance”, are restricted to only those businesses that operate in these industries.
After you have chosen a name, your business can be either incorporated immediately or retained for future uses. While you are preparing to set up your business, reserving your name will ensure that your name is protected for a specific period. Another important step in creating a brand is getting a domain name for your company.
Important: Get your company URL
Register your URL to strengthen your brand and fully embrace your company name. GoDaddy will allow you to quickly create a company website that is unique and exclusive to you.
2) Designate a registered agent
A registered agent is a person appointed by corporations to represent the corporation. This important role ensures that the state has a reliable point for contact with the corporation. Your Articles of Incorporation must include the address and name of your registered agent. To keep your personal obligations low, you can hire a registered agent service.
3) Fill out your Articles of Incorporation
Your corporation will not be officially created until you have filed your incorporation documents with Secretary of State. The articles of incorporation are the required document in most states.
Although the information in this document may vary from one state to another, there are some elements that all states require. To receive important legal documents for your business, you will first need to select a registered agent. On the form, you will be asked for the address and name of your agent.
Next, you will need to appoint directors for your first board. Most states require at least one to three initial directors. However, you may appoint additional directors if necessary.
4) Create your Corporate Bylaws
Your corporation’s bylaws could be the most important document you have. These bylaws are required by law and outline the corporate policies. This document will contain information about your company, such as its purpose statement, officers, financial year schedule, meeting schedules and the process of adding or subtracting members to the board, dissolution process and so on.
5) Get an EIN
Next, you will need to obtain a federal tax ID number from the Internal Revenue Service. The EIN, which is nine-digits in length, is used to identify your company for tax purposes. It is similar to a Social Security Number for individuals. EINs can be used to help your company accomplish important tasks such as opening bank accounts and hiring employees.
6) Have an initial meeting with your Board of Directors
Your first meeting with your new board will set the tone for future business ventures. The first meeting of your new board of directors will discuss the key aspects of your business such as your bylaws, setting up shareholder and stock agreements and appointing managers to run your daily business affairs.
7) Register for Taxes
Taxes are an essential part of running a compliant company. You’ll need to register both for federal and state taxes. Most corporations will have to pay federal income taxes and state corporate income taxes. Wyoming and South Dakota, however, are the only states that do not have this type of tax.
Additional taxes such as those relating to employment or specific industries may be required. If you have questions about taxation, you might want to speak with an accountant or tax professional.
8) Obtain Business Licenses
To be able to function properly, most businesses will require at least one license. Businesses involved in agriculture, for example, must obtain a license through the U.S. Department of Agriculture. Licenses are also required for many other industries. A few states also require a general business licence to be able to operate any company. For more information about licensing, the Small Business Administration is a useful resource.
9) Open a Business Bank account
It is not a good idea for your business expenses or personal finances to be tied down with someone else’s. This could lead to the demise of your corporation and even cause you and your owners to lose personal asset protection. You will need a business bank account to avoid the interplay between your personal and corporate finances. This is also a good time to start your accounting system. It is possible to use accounting software such as QuickBooks. However, if your company has complex financials it may be better to hire an accountant.
Tenth – Maintaining Your Corporation
After you have completed the formation process, your business is ready to go. You need to be aware of a few other important points that will help you keep your business legal and running smoothly.
First, you have to pay your taxes each year. Because corporate taxes can be complex, it may be a smart idea to hire an accountant. Most states require that you file an annual report on your business. This gives the state a snapshot of your company’s activities over the past year. It is vital that all corporations keep detailed records of their business activities. This includes meeting minutes, financial reports, as well as financial reports.
Pros and Cons of a Corporation
There are pros and cons to running a corporation, just like any other business. Some businesses find the rigidities of operating a corporation to be more detrimental than beneficial. It’s also not surprising that corporations require extensive maintenance.
We’ll be covering the six main advantages and five drawbacks of forming a corporation. What entity type is best for your company?
The Pros of Forming a Corporation
1. There are many benefits to forming a corporation. One of the greatest advantages is the fact that you are not personally liable for the corporation’s actions.
Your personal assets are protected by what is commonly known as the “corporate veil”. Your personal assets, such as your bank accounts, home, and investments, cannot be used as collateral if the corporation is in debt or has to go to court. The corporate veil is only effective when the corporation adheres to the legal requirements.
2. A corporation can also issue stock to raise funds. Stock can only be sold by corporations. Stock can be issued by both private and public companies. However, public corporations are more likely to issue stock. Corporations can sell stock or shares to raise funds for new campaigns and projects that wouldn’t be possible otherwise.
3. The cost of certain benefits that corporations provide to their officers and employees can be deducted by them. This tax deduction is not available to all entities.
4. A corporation’s lifespan is virtually limitless. The entity will continue to exist until the owners decide to dissolve it or when the dissolution date has passed. In rare cases, corporations may plan ahead to dissolve at a specific date.
5. The transfer of stock can also be used to transfer ownership of a corporation. Other entity types, such as sole proprietorships or LLCs, require a lot more paperwork and filing fees to change owners.
6. S-corporation status is available to smaller companies, which allows for significant tax reductions. This business entity is subject to a “pass-through” tax system, meaning that taxes are paid only at the individual level and no corporate income tax.
Cons of forming a corporation
There are some disadvantages to being a corporate owner, despite its many benefits. These should be considered.
1. One, corporations can be expensive to create and maintain. In Washington D.C. for example, the annual report is $300 and the incorporation cost is $220. Although not all states are as expensive, almost all require an annual reporting each year. There are also other fees. These fees can quickly add up.
2. Second, the government heavily regulates corporations. There are many regulations for corporations, both federal and state. Many states have a whole chapter in their statutes that is dedicated solely to corporations. These requirements must be met if you want to protect your personal assets.
This could result in you losing some of the creative freedom and autonomy you had as a different entity.
3. Taxes are not something that people enjoy. Unfortunately, corporations have a higher tax burden than other entities. The corporation’s personal tax liability is less than the individual one. This is because you will only pay taxes on income received as an employee or dividends earned by the corporation. However, the corporation pays a lot.
Double taxation is a term that applies to C corporations. This can make the burden even more severe. Double taxation means that the corporation must pay corporate income tax at 21% on its profits. When the corporation passes on its profits to shareholders as dividends, they also pay tax on the income. S-corporation status is the only way to avoid this tax. This is only available to smaller companies.
4. A corporation may not be the best choice if you need to have complete control over the management of your company. A corporation is usually managed by several officers and not one owner. In some cases, however, the management team may be unaccountable to the owners.
If a corporation has many shareholders, but not a clear majority, it would be impossible for them to direct the actions of its board. These situations are not common, but they do happen.
5. A corporation is not only expensive but also takes a lot time. It can take a lot of time to file the paperwork. You will need to file annual reports, maintain business licenses, keep detailed corporate records, host meetings for your board and shareholders, and many other tasks.
You have two options: either hire someone to keep your records and file paperwork on your behalf (e.g., a registered agent) or you can do it yourself. You’ll need to spend some time maintaining these files.
The most important decision you will make regarding your business is what entity type you should form. However, it can be difficult to choose the right entity type.
This decision can be made easier if you know the pros and cons. Corporations are a very popular type of entity. They provide entrepreneurs with a structured business structure that is ready to grow with their company.
A corporation is more costly and takes longer to manage than a limited-liability company. However, the LLC is not nearly as attractive to investors as a corporation and is less well-equipped for growth.
However, an LLC may have a lower tax burden that a corporation. You can choose which type of entity best suits your business’ unique needs.
Corporation VS Other Entities
We’ve discussed the advantages and disadvantages that the corporation has over other business entities throughout this article. We have detailed articles on each topic that will help you understand how the corporation compares with a general partnership, sole proprietorship, or LLC.
Let’s now look at the differences and similarities between each type of business to help you decide if a corporation is right for your company.
Corporation vs. Sole Proprietorship/General Partnership: A sole proprietorship or general partnership is basically the same thing. Both are informal business entities and don’t need to be formed. The only difference between them is that the sole proprietorship is for one person, while the general partnership is for at least two. These business types don’t provide personal asset protection. This is why we wouldn’t recommend that you operate a general partnership or sole proprietorship instead of a corporation.
Corporation vs. LLC: This is where things get more complicated. There are some clear advantages to the LLC over the corporation. They have flexible taxation, flexible business structures, a simpler formation process and (usually) lower maintenance expenses. The corporation does have some advantages. It can issue stock and attract venture capitalists. Although there are many exceptions, the LLC is the preferred entity type for most small businesses. The corporation is a good choice for larger businesses with ambitious expansion plans.