How to Form a Corporation

0


how to form a corporation

If you’ve decided to incorporate as a C corporation, S corporation, or B corporation entity, this article will outline all the steps you’ll need to take.

It’s common to feel a bit lost or overwhelmed at this stage, but with this guide, you’ll gain confidence in your ability to create your new business entity and get back to the work you love. We’ll review some new language and concepts in this process, but once you’re done, you may never need to think about this stuff again. 

A corporate business entity is like a whole and unique person that you get to create and control. 

It has its own tax life, laws, lifecycle, and care instructions. It absolutely is a responsibility, but the ability to incorporate is also the right of any U.S. citizen, so be sure to take advantage of it when it’s best for you. 

Think of the entity formation process like doing your personal taxes—you must submit everything correctly, but you don’t need to understand every detail of the laws and codes surrounding the process. Plus, there are tools that can help you get it right.

Here’s a checklist of the steps we’ll cover:

  1. Pick your home state (probably the state you’re in now) 
  2. Give your company a name
  3. Name your trusted inner circle of company leaders (or just yourself)
  4. Tell your state whom they can contact about legal matters
  5. Fill out some forms—your “articles of incorporation”—and pay between $100 and $800 to submit them
  6. Decide what the company should do and what it shouldn’t do
  7. Write that stuff down in a special book
  8. Hold your first board meeting
  9. Agree upon how much of this business each of your leaders owns, and write that down on slips of paper called “stock certificates”
  10. Follow the rules that your state lays out for you

Once that’s done, you’re free to get to work running and growing your new business!

Before we get started, you’ll want to prepare just a few things:

Let’s avoid getting caught off-guard during this process. Even if you’re chomping at the bit to get started, read through these initial ideas before diving in. 

Consider finding and working with a CPA and a lawyer. Having both will add cost, but they should also add significant peace of mind to your work throughout this process. Ideally, you will interview a few candidates and pick the partners you feel comfortable working with for a long time.

Also, creating a quick lean financial forecast will help ensure your business idea is viable and financially sound. An accountant with a mind for Strategic Advisory services can help with that, too. 

In addition to those two types of hired help, you can get free guidance and support from a local SBDC consultant. Having these experienced brains reviewing your business plan can help ensure you don’t waste time and money on what is really a cool hobby or rewarding social venture masquerading as a great business idea.

1. Decide on your business location

This fact may surprise you: Different states have very different rules for their corporations. As long as you follow their unique rules, it’s your right to create your new business in any U.S. state that you want. 

To keep it simple, I’ll recommend that you incorporate in the state that you are physically located in, and that you’ll do most of your business in. 

This option takes greatest advantage of your knowledge of your state and its laws, the helpful local people you know, and the ability to physically visit government offices if needed. Whatever you decide, take a moment to review the reasons the following states are popular choices for incorporation: 

Delaware is a very popular state to incorporate in, and boasts the highest number of incorporated entities in America. It appears extremely friendly to businesses, it has easily-understood legal processes, has well-developed corporate statuses, and some call it a “tax haven” because it doesn’t collect taxes from out-of-state businesses. 

Because of its popularity, Delaware is also statistically a popular state for investors to finance businesses. This sounds great, but doing business in another state means additional paperwork. You’ll need to pay “foreign qualification” fees when you register, name a “registered agent,” pay “franchise taxes,” and make required annual reports to Delaware. 

Nevada is also very popular because it boasts zero state corporate income tax, franchise tax, and personal income tax. While those sound like strict benefits, the reality is that many businesses still pay their local taxes and thus save nothing, and might even pay more, in total. Increased privacy is often promoted as a benefit, but you may be disappointed—feel free to test that idea by searching for corporate directors on Nevada’s website.

After those two, out-of-state popularity declines, though some other states are worth noting. Utah is often cited as having excellent online applications and forms. Wyoming offers no state income taxes and good asset protection. California can be appealing to California-based investors (particularly fast-growth tech companies) despite high income and corporate taxes, and franchise fees for all businesses regardless of size.

If those last three paragraphs muddied the waters, I’ll reassure you that most businesses that exist and do business in their own state should also incorporate there. You’ll avoid the potential extra headaches, paperwork, registration, fees, and legal compliance. Historically, the advantages that Delaware and Nevada offer tend to only benefit the very largest companies, or those with investors or buyers who specifically prefer those states for legal reasons. 
New Call-to-action

2. Give your business a name

When you’re naming your business, your goal is to pick one that:

  •  Describes your business
  • Will be remembered by your customers
  • Will not be rejected by your state
  • Will not cause legal issues later on

For some, the dream of starting a business starts with the name they’ll hang on their shingle. Others might care less whether their bar is “Joe’s Pub” or “Joe’s Tavern,” as long as they’re doing what they love.

While you invent your business name, consider the following quick tips:

  • Be descriptive: Yes, some popular companies have names like Google, Yahoo, and Bing, but most companies should indicate what the customers can expect from you. 
  • Be flexible: Think about your future. Don’t let an overly-specific name restrict your product offerings later. 
  • Be online: Consider your online domain name, especially if being found online is a key part of your business model.
  • Be yourself: Even if you are legally allowed to use a name, be sure you can’t be confused with others. Also avoid misleading terms like “bank” or “insurance,” which some states outright prohibit if not applicable to your type of business. 

Your business name must not be currently used by another corporation, particularly in your industry. An easy first step is to find the online search tool that your state provides online, sometimes called “Business Name Availability Check” or “Business Registry Database.” Search for it on your state’s Corporate Filing Office or Secretary of State webpage.

If you are working with a lawyer, you should get their feedback on the name you choose. If not, you can send a name availability inquiry letter to your state’s Secretary of State office yourself. Once you are confident that your name is unique and acceptable, you’re ready to file it as part of the incorporation papers.  

3. Appoint your board of directors

It sure sounds official, but your board of directors is just a group of people who are legally required to act in your company’s best interest. Oh, and one of those people can be you! Check with your state on the minimum number of board members, but assume you might want three people serving in this capacity. 

Most states also require individual board members to hold positions of president, secretary, and treasurer. It is certainly typical to include initial investors and mentors on the board of a new company, so pick your friends wisely, and consider their long-term commitment to your company’s success. 

The owner of the business is usually also a member of the board. For board members who don’t serve in other roles, the only requirement is attending board meetings in their assigned capacity. 

Note that if you are working with a lawyer or online incorporation service, you might name an “incorporator,” who is responsible for managing the articles of incorporation. This is typically a temporary role and ends once the incorporation process is complete. 

4. Name your registered agent

Your choice here is to either hire an agent or be your own. A registered agent is a person who is assigned to accept official mail and service of process in case of a lawsuit. This role must have a physical address in the state of incorporation, and also be available during business hours. In short, if someone is suing your business, this role ensures you can be found and contacted properly. 

If you’re working with a lawyer, they should have firm advice. If your business has a storefront that is open during normal hours, it is totally fine for you or your business itself to be your own registered agent. Anyone serving you can simply walk in your front door. 

Some businesses might prefer to outsource this role. If that seems appealing, the good news is that a registered agent can be hired inexpensively ($300 or less) and cover all your needs. This is particularly appealing for businesses with no physical address or irregular hours. 

5. Complete and file your articles of incorporation

Finally, you can actually create your corporation! Your decision here is whether to file yourself or hire a service. Either choice is good, and the online services are reliable and inexpensive. If you’re working with a lawyer, they might offer to file for you. 

With everything you’ve prepared so far, you shouldn’t worry much about this step—the documents are easy to complete and usually only a couple pages. 

The articles of incorporation are the official documents that you will file to legally establish your new corporation, including the name you’ve chosen, your registered agent, and your board of directors. If you’d like to file yourself, you’ll find the documents you need on your state’s Secretary of State website, and possibly at the physical location of the filing agency office. The cost of filing ranges between $100 up to $800 or so, depending on your state and type of entity. 

So, why use a service? 

Simply put, some people prefer the peace of mind, and others might find their state-issued forms a bit daunting. You’ll still need to gather all the same information either way, but if you prefer the extra guidance, you’re not alone. 

Extremely popular services like LegalZoom and Incorporate provide a step-by-step process and guarantee your forms are filed quickly, correctly, and completely. The cost of their services range from $80 to $400 (in addition to your state’s filing fees), which many find affordable. LegalZoom also provides many related services and products that might help guide your new business in the right direction. 

I’d recommend you find the correct forms yourself, and take a look at the process. If it seems simple enough, go ahead and file. If you feel there are a couple hundred dollars of value to getting help, go for it, and know that thousands of people make the same choice every month. 

6. Create your corporation’s bylaws

This is an easier step than it might seem. In fact, I recommend you keep your new corporation’s bylaws as simple as legally possible. It takes more effort to edit bylaws than day-to-day company policy or employment contracts, so this is a great time to write the minimum amount to comply with your state’s requirements. This is so common that many states (or your incorporation service) will even provide you a “fill in the blank” style template. In that case, use it!

The purpose of the bylaws is to outline the basic procedures and operations of your business. This will include many data points we’ve already covered, including the company’s name and location, the responsibilities and members of the board of directors. The bylaws will outline the rules to edit bylaws in the future. Finally, they will outline the next two steps we’ll discuss below: board meetings and distribution of shares. 

Again, resist any temptation to over-complicate or embellish your bylaws. Stick to the basic requirements and save your unique flourishes for your mission statement and marketing materials.

7. Create a corporate record book

If you used an incorporation service, they might have sent you a nice binder with your bylaws template, stock certificates, and maybe even a nifty corporate seal embosser (neat!). If so, this step is complete. 

If you’ve done these steps on your own, you’re going to need to find a retail location that will sell you a binder. I recommend the three-ring style with pockets. This binder is a legally required step and is the home for all your board meeting minutes, so make sure you actually do it.  Oh, and keep this binder in a nice safe place! To be safe, it’s optimal to keep seven years’ worth of these paper records on file, because, in a worst-case scenario, they can be requested in a legal proceeding.  

8. Hold your first board meeting

Your first board meeting is a critical step, but I recommend that you focus on the minimum required steps to fully comply, and save deeper discussions for other venues.

Here’s a reasonable step-by-step guide:

  • Set a meeting time and location that 100 percent ensures all board members will attend
  • Complete the bylaws and send them in advance to all board members
  • Call the meeting to order and your board secretary records the minutes of the meeting
  • The minutes name all the board members and their roles
  • Present documents including the articles of incorporation, bylaws, stock shares, and anything else required by your state 
  • You move and vote to accept the bylaws which everyone has read in advance
  • You put all that stuff into that nifty binder from the previous step
  • The current board (known as the initial board) appoints the board of directors, their roles, and their salaries (which can be zero dollars)—in most cases, these are the same people and roles as they were initially 
  • If you’d like, you can name corporate officers like your CEO, CFO, etc.

Again, the most critical step is to record the minutes of this meeting and put them in that record book (binder) from step six. There are templates online for this meeting, and I’ll just reiterate that most companies are best off following those templates, keeping this meeting simple and streamlined, and discussing all other business matters in separate meetings.   

9. Issue stock

Put simply, you’ll issue stock to formalize which people have what amount of ownership stake in your new company. 

The cash from each share issued can help the company start, run, and grow operations. For example, if your company begins with four stakeholders who own equal amounts of the venture, you might issue 1,000 shares of stock to each person, resulting in a 25 percent ownership for each of the four people. In fact, nobody technically owns the company itself, but rather people own shares of the company’s stock. 

The other aspect of the stocks you issue is the dollar value of each share you issue, known as par value. In the above example, if 4,000 shares are issued at $2 par value, each stakeholder pays the company $2,000 for a total of $8,000 starting cash in the company’s account. The company can then use these funds to operate the business.  

A fun (and useful) fact is that the lowest value a new share can have is zero dollars. It may seem odd, but this can be the simplest option for a company that doesn’t need cash to start. Using this approach, you could issue 1,000 shares each to four stakeholders at a value of zero dollars (or “no par”), and no money will need to be exchanged. Whatever the initial value of the stock, it is always possible to sell it for more—whatever an investor is willing to pay—at a later date, so don’t feel locked-in to this early decision.  

This process may seem daunting. There are conceptions of ownership, money moving into new accounts, sometimes even fancy paper. Indeed if you are working with a lawyer, they should make this process feel comfortable for your company’s needs.  

This article will not delve into the more complex options and requirements for a corporation’s stock. You can read further about the details of preferred stock versus common stock Classes A and B. 

Most small businesses will be fine sticking to small numbers of common stock only. Some corporations also need to register with the SEC, so be sure to research whether that is required for your company. Most small businesses are exempt from the SEC requirement, particularly if you are issuing small numbers of shares (5,000 is typical) to only a few people. 

10. Go run your new business and keep following the rules!

At this point, you’re probably relieved that you can get back to the work you love! Some important items to keep on your radar include:

  • Comply with the state requirements and regulations. For example, companies selling alcohol, firearms, or fish all must maintain licenses to conduct business. Each state will have its own business licenses and requirements, so this is another great area to rely on your lawyer to help ensure you are complying with all regulatory requirements. 
  • If you want to become an S corporation instead of a C corp, you have 75 days to file a simple form with the IRS. Form 8825 is not complicated, so if you want to go this route, get this form filled quickly and mail or fax it to the IRS. 
  • Alternatively, if you’d like your business to be a benefit corporation or B corp, you’ll have a few more steps you’ll need to complete. An excellent guide to the remaining considerations and steps you’ll need to take is here.
  • Get back to work, and good luck!

Primary sources

U.S. Small Business Administration: 

https://www.sba.gov/business-guide/launch-your-business/choose-your-business-name

https://www.sba.gov/business-guide/launch-your-business/apply-licenses-permits

IRS:

https://www.irs.gov/businesses/small-businesses-self-employed/operating-a-business

https://www.irs.gov/businesses/small-businesses-self-employed/state-government-websites

Was this article helpful?

Peter Thorsson

Peter Thorsson leads business development, sales, and strategic partnership work for Palo Alto Software, makers of LivePlan, where he creates relationships and programs that help entrepreneurs succeed. Peter has also started and sold a successful business with revenues over $1MM, directed Strategic Partnerships for Nickelodeon and Comedy Central, organized local Startup Weekend events, and judged business competitions for Rice, Princeton, Notre Dame, and others. Peter has taught contemporary business planning—from concept to execution—for many years in venues including Lane Community College, University of Oregon, Oregon SBDC, and Oregon SCORE. As a volunteer, Peter is the past president of the Board of Directors for Committed Partners for Youth in Lane County, formerly Big Brothers Big Sisters of America, and Board Director for Boys & Girls Club of Emerald Valley. He has also mentored individual local youth and local small businesses.



Source link

Share.

About Author

Leave A Reply

Pin It on Pinterest

Share This