Form a Corporation

Starting your own business can be very rewarding. One of the business entities business owners can choose to form is a corporation. A corporation is a legal entity separate from its owner. As such, a corporation can open a bank account, own assets, and be taxed separately under its own name. In many cases, incorporating provides liability protection to investors and shareholders as well by shielding their personal assets. Moreover, the manner in which the corporation is taxed will depend on whether you choose to form a “C” corporation or “S” corporation. Once you decide incorporating is right for your business, it’s important to understand the steps you’ll take to organize your business as a corporation.

Steps

Filing Your Corporation

1. Choose a corporate name. The name of your corporation should be original and not infringe another company's trademark. A trademark is any word, name, symbol, or design, or any combination thereof, used in commerce to identify and distinguish the goods of one manufacturer or seller from those of another and to indicate the source of the goods. Trademark examples include the McDonalds logo and slogans like “Just Do It!”
   • You can conduct a basic search of the United States Patent and Trademark database to find out if your proposed business name is already being used free of charge.
   • The name should not be the same as or too similar to an existing name on the Secretary of State’s record, and the name cannot be misleading to the public. For instance, you cannot choose the name “Twitter, Inc.” You would likely be unsuccessful at registering “Twetter, Inc.” as well.
   • The Secretary of State’s office for some states, such as California and Texas, can conduct a preliminary check on the availability of your requested name. You may have to make the check request via mail.
2. Ensure the name complies with your state’s corporation guidelines. This may include ending with a cooperative designator such as Inc., Corp., or Ltd. In no way should a name have words that would imply it is associated with the federal government such as National, Federal, or Reserve.
3. Check the availability of a web domain for the name. Since the internet is the easiest way for most people access information about your company, you’ll want to find an intuitive URL for your company’s website. If these are unavailable, you may want to consider a name change.
4. Register the name with your state government. Corporations must register their corporation name with the respective state government. The specific filing requirements will vary by state. To find out the requirements in your state, check with the U.S. Small Business Administration.
   • Some states allow businesses to reserve the name for a specified period. As examples, you can reserve a name in Texas for 120 days. and in California for 60 days. Some states may also require fees for name reservations.
5. Select a board of directors for your corporation. The board of directors is the decision-making body of a corporation. Directors make the financial decisions and determine major corporate policies and procedures. They're the ones who choose the officers, approve the issuance of stock, and set the salaries.
   • The owner(s) of the corporation can appoint themselves or other people to the board of directors. Most states require at least one director on the board no matter how many owners there are. There is some variance on this from state to state, so check your state's policy.
6. Procure any necessary permits or licenses. After completing all the necessary steps to structure your business as a corporate entity, you’ll comply with the other requirements of running a business in your state and locality. The following is a list of matters that you’ll need to address:
   • You'll need to obtain a business license and an employment identification number (EIN), which is your federal tax number, before doing any business. You will also need an EIN to open a business bank account.
   • Other permits or licenses that may be required could include a seller's permit or a zoning permit depending on your type of business. Check the federal, state, and local requirements to find out what your business will need.
   • The U.S. Small Business Administration has a complete list of state business license offices in order to find out what else your state may require here.
7. Complete and file your corporation’s Articles of Incorporation. A corporation’s Articles of Incorporation is a formal legal document that contains important information about the corporation, such as the corporate name, address of the main office, and—in some states—the names of the directors and the name and address of one person who will be a contact for the public. In some states these incorporation articles are known as a “Charter” or “Certificate of Incorporation.” You can complete and file your corporation’s Articles of Incorporation by:
   • Using a readymade form. In almost every state, a pre-printed, fillable Articles of Incorporation form will be available online or at the applicable Secretary of State’s office. For instance, the California Secretary of State provides a fillable .pdf online here. In addition, some states, including California, New York, and Illinois, allow you to file online.
   • Preparing a custom Articles of Incorporation. You may also prepare and submit a customized Articles of Incorporation as long as the document contains the information required on the state provided form. You will then file the custom Articles of Incorporation with the Secretary of State’s office.
8. Pay the filing fees. Regardless of which state you file in, you can expect to pay filing fees. Filing fees can range from $100 to $800 depending on the state where you choose to incorporate.

Setting Up Your Corporation after Filing

1. Prepare your corporation’s bylaws. Your corporation’s bylaws are an internal document that outlines how the corporation will govern itself and manage its day-to-day activities. In your bylaws, you can address the frequency of board of directors’ meetings, the number and name of corporate officers (i.e. President, Secretary, etc.), personnel policies, etc.
   • Though not submitted to the state, bylaws are important in proving the legitimacy of the corporation. They may even be necessary in applying for small business loans to help get your business off the ground.
   • You can draft your corporate bylaws, or you can have a lawyer draft them if you need additional guidance. You may also find free or low-cost legal assistance from legal incubator programs located in your state. You can find a list of programs available through the American Bar Association.
2. Convene with the board of directors for the first time. The board of directors typically make important decisions at the initial board of directors meeting. Some of the decisions and actions that usually take place at the initial board of directors meeting include:
   • Selection of officers
   • Adoption of bylaws
   • Stock authorization and issuance
   • Adoption of the official stock form and seal
3. Consider operating as a “C” corporation. The board of directors will have to decide whether to operate as a C or S corporation. The biggest difference is that C corporations are taxed at two levels, also known as double taxation. The income that the corporation makes is taxed at a corporate rate. Then the income is distributed among the shareholders, and they have to pay income tax on those profits. The potential tax advantage is shifting the income between the corporation and the shareholders so that both pay taxes in a lower tax bracket. Other notable aspects of a C corporation include:
   • The corporation can deduct medical payments up to a certain amount established by the corporation.
   • Only C corporations can become publicly traded companies.
   • C corporation require additional paperwork and filing.
   • The complicated tax forms will likely require an accountant.
4. Consider operating as an “S” corporation. In contrast, S corporations circumvent double taxation because the profits "pass through" the corporation to the shareholders. The shareholders are then taxed in their own individual tax brackets. Additional notable features of an S corporation include:
   • Shareholders are not personally responsible for the business’s debts and liabilities.
   • The ownership interest of an S corporation can be transferred without negative tax ramifications.
   • There are restrictions on stock ownership, and only one class of stock is available.
   • They cannot have more than 100 shareholders.
   • S corporations can receive additional IRS scrutiny because amounts distributed to shareholders can be dividends or salaries.
   • They offer less flexibility in allocating income and loss to specific shareholders due to the single class of stock restriction.
5. Determine whether to operate as a “C” or “S” corporation. After the board of directors has carefully considered the options, they will decide whether a C or S corporation best suits their business.
   • When evaluating taxation options, be sure to consult with a financial or tax advisor to obtain advice with respect to your corporation’s particular finances and business needs. If you ultimately decide to form set up an “S” corporation, you’ll need to file an IRS Form 2553, which informs the IRS that you are selecting to be treated as an S corporation.
6. Distribute stock certificates to the corporate shareholders (owners). Issuing shares is a formal requirement for corporations. This divides up the ownership interests of the business.
   • If the corporation is large it must register its stock with the Federal Securities and Exchange Commission as well as the state's security agency. Registration is time consuming and usually results in extra accounting and legal fees.
   • In most cases, small corporations—ones less than ten owners where the owners are actively involved in running the business—should qualify for exemptions from registering with the securities agencies.
7. Create a stock purchase agreement. Depending on the structure and nature of your corporation you may need to also create a stock purchase agreement. These agreements allow a founder to purchase shares from the company and outlines the terms for doing so.
8. Record any assigned patents or trademarks. If you’re forming your business around a specific technology or invention, then you will especially want to record any patents or trademarks. You may want to seek the assistance of a patent attorney for help with this process.

Warnings

• This article is for informational purposes only and not for the purpose of providing legal advice. You should consult with a licensed attorney before taking any action that may affect your legal rights and obligations. If you need additional guidance you may contact a lawyer through your State Bar Association.

Related Articles

• Create an S Corporation
• Form a Holding Company
• Incorporate a Business
• Change an S Corporation to a C Corporation

Sources and Citations

See also

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