So, you’ve opened a new business, and now you want to register it as a corporation in your state. What process should you follow? What requirements or fees should you meet or pay?
Compared to other business structures, corporations are the hardest and the most time-consuming to set up. They require a good deal of filing fees plus filling in paperwork. This business structure is an excellent choice if you’re looking to raise money from investors or list your entity on the stock exchange one day.
Steps to Forming a Business Corporation
This post will outline the steps to follow when incorporating your business. We will also discuss the types, characteristics, requirements, and fees payable when forming a corporation.
Characteristics of a Corporation
Corporations have several unique characteristics that set them apart from other business structures. Let’s explore a few attributes that come with a corporation:
A corporation is a separate legal entity from its owner or shareholders. This business structure has its own legal rights distinct from those who own it. A corporation can own, buy and sell assets under its name. It can also enter into a binding contract or litigation as its own entity.
Limited Liability Protection
A corporation offers limited liability protection to its shareholders. If you take a loan in your corporation’s name, your lender or creditor cannot claim your personal assets if you default. They only have a legal claim on your corporation’s assets.
Corporations are subject to double taxation. They pay taxes twice, once at the corporate level and again at the individual level. Corporations pay taxes on the profits they make at a certain period or quarter. They also get taxed on the dividends distributed to the shareholders.
Ability to Raise Capital
It’s easier for a corporation to raise capital than any other business structure. Corporations can raise money from investors by selling common and preferred stocks. They can also acquire funds through corporate bonds and loans from banks and lenders.
The process of transferring ownership in a corporation doesn’t require approval from other shareholders or from the entity itself. You simply sell your shares to private or public investors. Once you sell them, you give up your stake in the business, and the new investor becomes a part-owner. In a partnership, you would have to consult all your partners before transferring ownership.
Board and Management Structures
Corporations have a more complex management structure than any other form of ownership. They need to have a board of directors representing the shareholder’s interests.
The board should hold annual formal meetings and record the minutes discussed. They should also elect a team of executives who then employ senior managers and other employees in the corporation.
Types of Corporations
C-corps are the most common of all the other corporate structures. They are subject to double taxation and can be formed by any aspiring entrepreneur or entity, whether domestic or foreign.
There’s no shareholder limit in a C-corp. This business structure can have as many owners as it wants, whether 10 or 1000. Transfer of shares is relatively easy and limitless in a C-corp.
An S-corp is a corporation taxed like a sole proprietorship or partnership but operates like a corporation. This business structure isn’t subject to double taxation. The IRS taxes an S-corp at the individual level through the pass-through taxation method. The profits or losses of the S-corp get split up amongst shareholders, who then report the taxes on their personal tax returns.
There’s a limit to the number of shareholders an S-corp can have. It can only have a maximum of 100 owners. To register your corporation as an S-corp, you, the owner, need to be a United States citizen. Your corporation should also offer only one class of stock and have less than 100 shareholders.
A non-profit corporation is a type of corporation that’s a separate entity from its owners and whose goals don’t entail making a profit. This business structure isn’t subject to taxation. You can register as a non-profit corporation if your goals involve charity, education, or religious work, or at least anything other than making a profit.
Requirements for Forming a Corporation
What legal obligations should you or your business meet to form a corporation? The requirements may vary depending on the corporation type you select. Some should be adhered to when registering the corporation, while others after the incorporation process is complete.
The two requirements that need to be met when forming the corporation include:
1. Filing Articles of Incorporation
You need to file articles of incorporation if you want to register a corporation in the United States. This set of formal documents acts as proof of registration and authorizes you to run the cooperation. The information to provide on the articles of incorporation include:
- Your entity’s name
- The entity’s address
- Your registered agent’s name and address
- Information on Stocks
- The corporation’s purpose
Some requirements may vary depending on the state where you are incorporating.
2. Creating Corporate Bylaws
Corporate bylaws are rules that govern the daily operations of the corporation. They contain information like the corporation’s name and procedures for doing business, issuing stocks, and holding board meetings. You can create the corporate bylaws before or after forming the corporation.
Let’s explore the requirements that your corporation should follow after incorporation.
- The corporation must file tax returns annually.
- The corporation must elect a board of directors.
- The board of directors must hold an initial meeting and subsequent meetings at least once a year.
- The corporation must maintain its bookkeeping, records of shareholders, and accounting ledgers.
- The corporation must record and maintain board meeting minutes.
- The corporation must issue securities (stocks) to shareholders.
Fees for Forming a Corporation
The total fee payable for forming a corporation depends on your state and the incorporation process you follow. You can either incorporate the business yourself or hire experts to do it for you. Whichever method, you still have to pay the incorporation filing fee. You’ll pay this fee when filing articles of incorporation with the secretary of state in your location.
The filing fees vary from one state to another. In Delaware, for instance, you’ll pay $89. In California, the filing fee is $100.
Other costs that may arise when incorporating include:
- Incorporation service costs – you’ll pay this fee if you choose to hire an expert to incorporate your business for you. The fee may range between $200 and $1000, depending on the service provider.
- Attorney’s fees – You can hire an attorney to assist you with incorporating and creating the corporate bylaws. The cost may range between $250 and $600 per hour. Some attorneys may charge you a fixed fee for drafting the corporation documents.
- Registered agent fees – You must have a registered agent when incorporating your business. The registered agent can be you or another owner or employee in your entity. It can also be a registered agent service company that you hire. If you choose to hire a registered agent service company, you may be subject to paying the registered agent fees. They range from $100 to $300 per annum.
- DBA registration fee – payable if your corporation operates under a name that’s not the one registered with the Secretary of State. It may range from $25 to $50.
- Licenses and permits fee – payable if you need a license or permit to conduct business.
How to Form a Corporation
Here are the steps to follow when forming your corporation:
1. Choose a Location
It’s always advisable to incorporate your business in the state where you conduct your operations. But if you have operations in more than one state, go for the one with the most favorable tax laws, for example, Nevada.
The rules and requirements for forming a corporation may vary from state to state. Take some time to learn the ones that apply to your state to ensure you don’t miss out on any essential steps.
2. Select a Business Name
Once you select your state of incorporation, your next step should be to choose a name for your corporation. Try selecting a business name that’s memorable, unique, and describes what you do.
Your business name should also not infringe any trademarks. It shouldn’t be in use by any other business in your state.
You can check the availability of the name on social media and online directories. You can also use name search tools provided by your state or the secretary of state in your area.
3. Appoint a Board of Directors
A board of directors is a group of people appointed by a corporation or an entity to represent the shareholder’s interests. When incorporating your business, the state requires you to nominate a board of directors.
The minimum or the maximum number of directors depends on the state but try and appoint at least three people. You can nominate other shareholders, investors, mentors, even yourself.
Some states may also require you to appoint a president, treasurer, and secretary to the board of directors.
4. Appoint or Hire a Registered Agent
A registered agent is someone you appoint to receive official and legal documents on your entity’s behalf. This person can be you or someone in your corporation. It can also be a registered agent service company that you hire.
The registered agent you select should have a physical address in your state of incorporation. They should also be reachable during business hours.
5. File Articles of Incorporation
Once you appoint your board and nominate your registered agent, you can begin the incorporation process. You will need to fill in articles of incorporation and file them with the secretary of state in your area.
As highlighted above, the information required in the articles of incorporation includes your corporation’s name and address, stock information, and your registered agent’s name and address.
If you plan to register as an S-corp, you can apply for the S-corp status with the IRS once you incorporate.
6. Draft Your Corporate Bylaws
You can draft your bylaws before or after filing your articles of incorporation. They are a set of rules that govern the management and operations of your corporation. It’s better to consult an attorney if you don’t know how to draft the corporate bylaws.
7. Hold the First Board of Directors Meeting
The state requires your board of directors to hold an initial meeting. Try and set a date, time, and location that ensures every board member shows up.
Your agenda in the initial board meeting can be to vote on the bylaws and appoint a president, secretary, and treasurer. You can also authorize the issuance of stocks. Don’t forget to record and store the minutes of the meeting.
8. Issue Stocks
Your next step should be to issue stocks once you get approval from the board. The issuing of stocks will help formalize ownership in the company. Every shareholder will know how much stake they have in the corporation.
9. Begin Operations
Now that you’ve registered your corporation, you can begin operations in your state. There may be other steps to follow when forming your corporation, but they depend on the nature of your business. For example, you can obtain licenses and permits if your business requires you to do so. You can also open a corporate bank account and apply for an EIN if you don’t have one.
The process of forming a corporation is a bit complex compared to other business structures. There are several requirements that you need to meet before and after incorporating.
The most common corporation types you can form in the US include S-corp, C-corp, and non-profit corporations. Any individual or entity can form a C-corp, whether a United States citizen or foreigner. To register as an S-corp, you need to be a permanent resident in the United States.
The process of incorporating involves choosing a state and a business name, appointing a board of directors, and filing the articles of incorporation with your secretary of state. You should also nominate a registered agent to receive legal documents on your corporation’s behalf. Once you incorporate, draft your corporate bylaws and hold the first board meeting.