Do you want to form a corporation? Then, you need to follow some steps to form the corporation correctly. We’ll look into the steps you need to follow.
What is a corporation?
This is an entity that allows a group of people to manage a business together. The corporation somewhat has similar rights to a person. When you form the corporation, you will find that you will provide those who form the corporation with an umbrella of limited liability.
The corporation can acquire assets, file a lawsuit, can also be sued, or hire employees. When you have a corporation, one great benefit is that it will shield the shareholders’ personal assets.
Here are some things that you need to consider when forming a corporation. It is important to get guidance from the state where you reside. Understand that there are different types of corporations, and this depends on where the business will be conducted and how it will be managed.
There are two main types of corporations. The first is the S Corporation, which is termed a Subchapter S corporation, and the second is an LLC that’s a Limited Liability Company.
If you reside in California, you need to know that there are several available business organizations to choose from when forming a corporation. In addition, note that your organization can be formed as certain types of non-profit corporations for California law. You will find this information in the California Corporations Code. The main focus is not on the state of California. But with an example, you can easily relate to the discussion about forming a corporation.
In addition, you will find that if you’re going to be forming a corporation in California that it’s important to become familiar with the Small Business Corporation Act; this should help you with your information requirements and the type of corporation you are forming.
Roles of the Members
It is important to know how many members will be involved in forming your new corporation. There are three types of members; one person, two or more persons, and shareholder(s).
You’ll find that a shareholder will have ownership of the shares. It is important to understand that if you form your corporation as a limited liability company, you will form partnerships.
When forming a corporation, one of the things that you need to state is how many shares are owned by each member. You’ll find that this is important because when you are saying how much each shareholder will own- it also indicates how much voting power each member possesses.
When you form your corporation, one of the considerations you need to make is how many shares each member owns. In addition, you will find it is important to decide what the shares are. For example, each shareholder can be given one share in your corporation.
The steps to follow when establishing a corporation include:
1. Choose a Name
This is one of the most important steps. It is important to select a name that you can use in conducting your business. You will find that there are some states where the name of the corporation must contain an indication such as “corporation,” “Incorporated,” “company,” or an abbreviation.
You will also find that in a state such as California, the name should indicate whether it’s a corporation or limited liability company (LLC).
2. Check the Name Availability
You need to choose a marketable name, and it should relate to the products and services your brand is offering. After that, you should ensure the name is legally available. Note that there are legal disputes when it comes to trademarking. You should also choose a name that is available or has not been previously claimed in the market.
Furthermore, the name shouldn’t be too close to another organization’s name, or it could cause confusion.
3. Register a DBA Name
There are instances whereby you’ll need to register a fictitious name. For instance, Apple Inc. chose to register its business name as a Delaware corporation. You will note that they selected the name Apple Corps; this meant that they had to register it with an assumed name called “Apple Corporation.”
You will find that when you are registering a fictitious name, you should have the consent of your shareholders and the board of directors. In addition, you need to ensure that it doesn’t violate any law. Note that there are cases where there is no restriction on using a corporate name as part of the fictitious name.
4. Appoint Directors
The owner of the corporation will be the one to appoint the directors. In most cases, the owners will appoint themselves as directors. However, you will find that the shareholders can also elect directors if they like. You should note that the directors will help with the corporation’s operation.
5. Filing the Articles of Incorporation
The article of incorporation is supposed to be filed with the Secretary of State Office in the state where you’re establishing the business. When you are filing, it will be important to make a copy of the articles and record it in your company register.
You will find that the articles of incorporation will refer to how many shareholders there are and their shareholding percentages. It is also important to define what type of shares they will be given when they join the business. Another thing that you should include is the name of the corporation and its location. You can include other details, such as the business address, the registered agent, and if they want to be taxed as a corporation or an LLC.
6. Compose the Corporate Bylaws
Bylaws usually rule how the organization will be run. You will find that you’ll be making a policy to guide your business operation in this process. It is important to note that bylaws can be used as an agreement, and it can also give the shareholders and board of directors an understanding of how the corporation will be run.
You should ensure that the bylaws are clear and concise, they should not contradict each other, and you should also have a document that all shareholders easily understand.
7. Come up with a Shareholder’s Agreement
The shareholder’s agreement is optional. However, the agreement comes in handy in the event of the retirement or death of the corporation’s owner. You’ll find that it can give the successors or family members an option to take over. Moreover, you should ensure that it does not hinder any shareholders’ rights.
Once you have your bylaws in place, you will find it important to create the shareholder’s agreement. It is important to note that you should ensure that the shareholders and directors understand their rights and responsibilities.
8. A Board of Directors Meeting Should Be Held
Whether the corporation has one director or many, a meeting should be held; this is when you will be required to approve the business name, bylaws, and articles of incorporation.
Your board of directors will also be required to appoint officers such as a secretary, treasurer, and CEO. The bylaws should state if there are officers or not.
9. Issue Stock
This is one of the final steps. In this step, the corporate shares will be distributed to the shareholders. You’ll need to get a certificate that indicates the shareholders are now owners when it comes to this process. Moreover, you should ensure that these certificates represent what each member owns and how many shares exist.
Note that these certificates should indicate how much ownership and voting right a member has in your business.
10. Obtain Business Licenses and Permits
The most important thing to consider when it comes to business licensing is ensuring that the business is properly licensed in your state. You will find out that there are several licenses that you can acquire, such as permits and certificates. However, note that some states require certain licenses while others do not.
You should also ensure that your business is registered with the state before applying for any license or permit; this is an important step. You’ll need to make sure that the business name, principal place of business, and the shareholders are indicated.
11. Register with the Local and State Tax Agencies and IRS
You should note that your business will be required to pay taxes with this step. You will find that you’ll have to fill out different tax forms such as 1040, the estimated tax, and others. When it comes to registering with the IRS, you’ll need to file a tax return and fill out an EIN. Moreover, you should locate the nearest service center where they can provide your business with an EIN number.
12. Open a Bank Account for the Corporation
If you decide to keep your business in a corporation, you’ll be required to open a bank account. You will find that a corporation can open its own bank account because the owners are not allowed to take money from the company’s operations.
You are required by law to maintain financial records and ensure that cash receipts and checks are deposited in an authorized bank account. Note that most banks will require you to fill out different forms before they can provide you with an account.
What are the Pros and Cons of a Corporation?
A corporation is similar to any other business, and it has its pros and cons. For some business models, the cons may outweigh the pros. When establishing a corporation, you should keep in mind extensive maintenance is mandatory.
The Secretary ofMoreover, as a business entity, the corporation must be organized within the given time frame. You can also expect to pay more in taxes, and you will also have to pay additional fees. However, even though this is the case, some other corporations’ benefits include managing their responsibilities on a federal level.
Aside from its pros and cons, you’ll find that setting up a corporation is an expensive process that will require sufficient effort.
Check out our Corporation vs LLC guide.
The pros of a corporation include:
1. There is Limited Person Liability
This is one of the most important advantages since your assets are protected. You’re required to be aware of the activities and the risks that your corporation takes. However, you will not be held personally liable if your company fails.
2. It is a Separate Legal Entity
In this case, you will find that when creating an LLC within a corporation, all ownership rights are protected within the corporation.
3. Tax Advantagestity
You’ll find that if the corporation is set up as an S-Corp, it will have tax advantages. You’ll need to include this fact in your business plan when it comes to incorporating.
4. Limited Liability Protection
The limited liability protection that comes with a corporate entity means that you are only responsible for the debts of your business. You should know that creditors cannot go after your personal assets when it comes to paying for their claims.
5. It is Affordable
Even though it is a long process, setting up a corporation will not be expensive; this is because you’ll be required to pay certain fees, but you can expect to pay less compared to incorporating or forming an LLC. You should note that this process does not require preparing any particular business documents. However, you’ll need to decide whether to keep the business in-house or acquire an S-Corp status.
6. The Corporation Gets Tax Exemptions
The corporation can get tax exemptions. These include the overall income tax, self-employment tax, capital gains, and even gift taxes; this is possible as you will be considered as a separate entity.
The cons of a corporation include:
1. It is Expensive to Maintain a corporation.
You will find that maintaining a corporation can become rather expensive as it is not a simple process. You’re required to hire an attorney who will be able to guide you on the necessary steps. You’ll also be required to pay a state filing fee.
2. It is Subject to Extensive Rules and Regulations
In addition, when you set up the corporation, you’ll need to comply with the extensive rules and regulations set by the state and the federal government.
3. There is a Limited Number of Employees
When it comes to employing people, you’ll need to ensure that you have all the necessary permits and licenses; this means that if you plan on hiring the right number of employees, then you’ll need to find the right type of business entity.
4. It is Expensive to Maintain and Transfer Stocks
When it comes to transferring stock within the corporation, there will be a cost if no one is involved in the transaction. However, when it comes to transferring the shares out of the corporation, you’ll find that there is an additional cost.
5. The Corporation Has a Limited Number of Shares
When it comes to the number of shares, you will find that there are limitations on how many shareholders can be involved in the transaction. You will be required to have a specified number of shares to do this.
6. The Corporation’s Liability is Unlimited
Even though the corporation has limited liability, it can be subject to unlimited liability; this is especially the case when a shareholder does not have sufficient funds to pay for the legal claim that has been made against their company; this should make you aware of the risks and liabilities that are related to your business.
What Should You Consider Before You Establish A Corporation?
Some of the important things you should consider include:
1. Are You Confident Enough In Your Business Concept?
You cannot predict how a new market will respond to your business. However, when you gauge your business idea, does it look promising? This means that the corporation should be formed if you are certain that you can maintain a steady growth rate.
2. Do You Have Enough Resources and Funds to Maintain Your Company?
It is important to note that you need to maintain a full-time business staff. The expenses will be high, and you’ll also need to hire an accountant as well as an attorney to ensure everything goes according to plan.
3. How Risky is Your New Business Endeavor?
To determine this, you’ll have to factor in the risks involved in setting up a new business. You must be aware of the risks and liabilities related to your new business.
4. How Much Tax Will Your Corporation Pay?
You will find that based on the type of corporation, there are different tax rules with respect to income taxes and self-employment taxes; this means that you will need to take note of these rules even if your company does not pay this additional tax.
5. How Much Control Do You Want to Have Over the Corporation?
As you are required to be a shareholder, you will also need to manage the corporation in all aspects; this means that you’ll be required to determine how much control you want over your business.
6. Is Your Business Concept Consistent with What You Want For Your Corporation?
You will find that there is a lot of information related to corporations needed to make an informed decision before you incorporate it. You must go through this information and make the right decision.
7. What is Your Plan to Grow the Corporation?
When you are starting a corporation, you will need to make sure that you plan to expand it. Your brand will require taking different markets, which means that you’ll need to make sure that the corporation can grow.
You should note that it is important to get all the details about your new business before you incorporate it; this means that you should work through all the information before deciding on whether or not it is right for your situation.
8. What Do You Think of the Drawbacks of Establishing a Corporation?
You will find that there are many drawbacks associated with incorporating your business; this means that you should make sure that you’re aware of all the possible drawbacks before making a decision.
Tips That Can Help You with Your Business Incorporation
1. Form an LLC Before Incorporating Your Business
When it comes to establishing a corporation, some states allow the incorporation of limited liability companies (LLCs); this means that you will be able to register your business as a corporation in a particular state, but it is still treated as an LLC.
The laws will vary from one state to another, and you need to make sure that you’re familiar with the necessary information before establishing your company.
2. Incorporate Your Business in Another State
Even though it is possible to incorporate your business, most entrepreneurs choose to incorporate their business in another state; this means that they will then be able to operate their business in a less restrictive state.
For example, you will find that states such as Delaware are more accommodating when it comes to the incorporation of corporations; this means that you can choose from the laws of Delaware and have your company registered in this state. However, it is still treated as a limited liability company (LLC).
3. Choose the Right State for Your Business Incorporation
In most cases, you must choose a state with the best business incorporation laws; this means that you will be required to do some research on your own. You’ll need to look at the state’s business tax rates, corporate law, and other information related to your business incorporation.
Even though you want to incorporate your business in another state, you’ll also want to consider the state’s income tax as well as other relevant considerations.
4. Look at the Benefits of a Corporation
Different benefits come with establishing a corporation. First and foremost, it offers limited liability protection to its owners. You must look into all the possible benefits before deciding how you want to incorporate your business.
5. For What Purpose Will You Use a Corporation?
You will find that most corporations are incorporated to cater to a specific purpose; this means that you’ll need to establish what your company will be used for before you incorporate it.
There are many different types of corporations, and you’ll also need to determine which type will be best suited for your new business.
Using a Corporation to Avoid Liability
If you want to know how a corporation will help you avoid liability, then read on. When it comes to corporations, some basic facts should be noted, and they include:
1. Corporations Can Typically Exempt from Federal Income Taxes
You will find that when you incorporate your business, only certain tax benefits may apply, such as the federal income tax. However, you can also look into many other tax advantages available. Some of the tax advantages include:
Federal Employment Credit (FICA)
Exclusion of Gain
Bad Debt Deduction
2. Corporations Can Easily Pay Workers
You will find that companies use corporations to pay their employees. Most corporations can provide various benefits to their employees, such as employee stock options and deferred compensation plans.
3. Corporations Can Incorporate Foreign Assets
Even though most corporations are incorporated in the United States, it is possible to incorporate foreign assets such as property, shares, and other assets ;this means that you can obtain some tax benefits when you do so. However, you will still need to follow the rules and regulations of the states where you will be incorporating your corporation.
4. Corporations can Reduce Their Tax Liability
Even though corporations are not subject to federal income taxes, they can also reduce their current tax liability; this can be done by offsetting losses, including tax credits, and even carrying forward deductions.
5. Corporations Can Get Certain Tax Benefits
Many different tax benefits come with having a corporation. Some of these are:
Tax-advantaged retirement contributions
Tax deductions for health benefits claimed by your employees.
S Corporation elections.
6. Corporations Can Easily Maintain Their Records
Incorporating your business is easy when you have the necessary records to back you up. When it comes to keeping information, there are different types of corporations that can help you as well. For example, you should look into S Corporations and Natives (S-1).
Which is the Most Suitable Time to Incorporate Your Business?
Most entrepreneurs will choose to incorporate their business when they have registered as a limited liability company. However, there are different reasons why an entrepreneur may choose to incorporate their business in a particular year.
1. When they want to start another company
If you want to establish another company, then you may consider incorporating your business in a different year so that the corporation can function as a separate entity from the LLC.
2. When they want to complete a merger
If you and another company want to merge your businesses, you will want to consider incorporating the business after it has been merged; this means that you will avoid the problems that may arise if the company is not incorporated.
3. When they don’t have business activities
Most corporations are used when an entrepreneur doesn’t have other business activities. In this case, they can incorporate their business and then use their corporation as a vehicle for investment or business interests.
How To Start a Corporation By State
Choosing to incorporate your business is a big decision, and you need to make sure that you’re fully aware of everything that will come with this choice. You must look at the different factors before deciding on whether or not to incorporate your business.