First, what exactly is a corporation?
The process of registering your business as a corporation is called incorporation. Corporations are generally controlled by three different parties; shareholders, directors, and officers. The corporation is owned by the shareholders and they elect a board of directors who decide on matters of policy and management. The board elects officers who manage the business from day to day such as CEOs, CFOs. etc.
There are two main types of corporations: S-corp and C-corp. C-corps are the most popular. C-corps are taxed once at the business level, and again on dividends to shareholders who are taxed on their personal tax returns. The owner of a C-corp has the choice of organizing the company as an S-corp. For a S-corp, profits and losses pass into the personal tax return of the proprietor and are taxed at the tax rate for their personal income. S-corp and C-corp vary considerably, but taxes are the most critical factor that small businesses need to remember.
At any point in your corporate life, you can shift from C-corp to S-corp and vice versa; but preferably, you need to know the form you want for incorporation to use.
Here we will help you and provide step-by-step Instructions on how to incorporate a business
You must first ensure that you are in the clear with local business licenses and zoning authority before you are allowed to incorporate your business. Although most companies do not necessarily need licenses or permits to work, regulated sectors such as food or childcare need them. Make sure that you conform with local law so that you do not have to think about it when you start your company.
Next, decide on a business name. In order not to confuse consumers, your local secretary of state will not permit you to use the same name as another business in the area, so make sure you choose a unique name. Moreover, choosing the same name of another corporation can be a violation known as trademark infringement, and can lead to legal issues. Keep in mind that as a corp, you will have to tag a signal such as Inc., Co., or Corp. at the end of your company name.
Many secretary of state offices have an online database where you can search the name you would like for your business in order to ensure it is open for use. When the name of the business is open, several states can also permit you to complete a “reserve” form for 60 to 120 days during the duration of the incorporation process.
After choosing a business name, you will then name a registered agent. A registered agent is the person or company that will accept the mail on your behalf. When you set up a corporation, your state will require you to appoint a local registered agent to receive service of process (if the business is sued) and other official paperwork for your business. If you have a legal advisor, they will act as your registered agent as long as they have a registered office. A director, officer, or employee may also serve as registered agent if they reside in the state of incorporation. If the identified agent leaves the state, a new agent will need to be assigned.
The next step would be to Draft Articles of Incorporation. This certificate of incorporation, also known in some states as a corporate charter, is the document that must be filed with the secretary of state in order to create a corporation. The certificate contains the business’ name and address, number of shareholders, the name and address of the registered agent, and the name of the incorporator. On the secretary of state’s website you can typically find the articles of incorporation form. After drafting and reviewing your document, you will then need to file your articles of incorporation with your state. In order to do so you will need to pay the fee, which is about $100-$500. If you are struggling, contact your secretary of state’s website and follow the instructions there. There are services as well that will perform this service for businesses.
You will then write up your corporate bylaws. Your corporate bylaws is a document detailing how your organization is organized and operated. This document covers securities, voting privileges, shareholder and board meetings, how to replace board members and officials, and other information.
Additional details that can be found in the bylaws include:
- Number and form of shares the business can issue
- Details concerning shareholder meetings, board meetings, and the annual meeting of each organization
- Frequency and process for financial audits and corporate records
- Corporation’s tax and bookkeeping of the fiscal year
- Procedure to modify incorporation articles and bylaws
Usually, company bylaws are much longer and more comprehensive than Articles of Incorporation. While several states do not need you to register the bylaws, you can keep them secure in your company reports, so when you are audited, need a business loan, or choose to collect funds from investors, you can easily disclose them.
Subsequently, you will need to start a corporate records book. A corporate records book is where you store documents that indicate the status of your corporation’s compliance with IRS and corporate state rules. Here are some of the key papers to have in the company records:
- A copy of the articles of incorporation
- A copy of bylaws
- Minutes of shareholder, board, and annual meetings
- Business loan documents
- Annual reports
- Stock transactions
- Copies of company contracts
- Documentation detailing commercial real estate transactions
While it is referred to as a corporate records book, it is fine to store the documents on your computer in any format. Records should only be anywhere you can conveniently generate them if the company is audited.
Once you have all your files in order, you will be able to hold your first board meeting.
The members of the board will:
- Adopt articles of incorporation and bylaws.
- Decide the corporate seal.
- Authorize and sell equity shares to original owners (sometimes named “capitalizing a corporation”). Stock issuance is subject to complex securities regulations, so finding a securities lawyer is wise.
- Officially elect officers, including the CEO, CFO, etc.
There are several final steps that need to be completed before you can call your business a corporation. Some federal and state requirements include:
- Apply for an EIN (employer identification number). You can apply free of cost on the IRS website.
- Open a business bank account.
- Pay your tax payments. Federal corporate taxes are due on a quarterly basis, while state tax laws differ from state to state.
- Some states require businesses to send out notices for the corporation, declaring the formation of the corporation in a newspaper for a certain period of weeks.
States have specific laws to obey and retain the corporate status. You typically have to submit an annual charge or send an annual report. Remember to contact the IRS, the secretary of state, or your lawyer if you have any concerns about your business.
If you are an S-Corporation, there is one more additional requirement. Within 75 days of incorporating your business, you must file the IRS form S-2553-Election as a small business corporation. This will enable the election to take place that year. Know that you cannot submit this form online; either fill it out and send it in or fax it to the IRS.
- Basic business information (name, address, EIN)
- State and date of incorporation
- Shareholder information
- Business‘ fiscal year
- Date the S-corp election will take place
Many businesses that start as sole proprietorships or partnerships tend to convert as they start making more profits or need to apply for financing or a business loan. In light of the Trump tax reform, several members of limited liability companies (LLCs) intend to turn their firms to corporations. To turn from a sole proprietorship to a company, just implement the measures described above. Converting from an LLC to an organization is more difficult, since you radically alter the company’s ownership structure. Here you can get support from an attorney. Although the methods differ by state, there are three key ways to transform an LLC to a company.
- Statutory conversion (simplest) – Make all LLC members accept and file a conversion certificate with the state, along with other necessary documentation, such as LLC papers.
- Statutory merger (more complex) – Have LLC members create a new company and legally swap membership privileges for corporate stock shares. You must officially dissolve LLC.
- Non-statutory conversion (hardest) – Create a separate company and draft legal documents to swap LLC membership privileges for securities and pass LLC debts and liabilities to the corporation.
When you turn your company to a corporation, it remains the same for preservation of the corporate status. You will have to hold board sessions, retain company papers, etc.
The final step would be to choose which state to incorporate in. The best thing is to integrate anywhere your company is based, but often there is a benefit to incorporate in a more “corporate-friendly state” like Delaware, Nevada, or Wyoming.
Nevada and Wyoming do not impose federal income tax or state sales tax. Similarly, Delaware has no corporate income tax for companies founded there but doing business elsewhere, and they do not collect personal income tax on non-residents. While it might sound enticing, the important point to note here is that you cannot avoid taxation easily by incorporating in another state. For example, if the company is based in California, you will have to file to do business in California and pay California taxes even if the business is registered elsewhere. That leaves Delaware—where over 50% of publicly listed US companies are incorporated. Many company owners prefer to enter Delaware since it provides a different court structure for companies and persons, and as investors feel more relaxed investing capital into a Delaware organization. These concerns don’t really extend to small business owners who don’t want to collect investment money.
Please be advised that all of the foregoing is NOT legal or accounting advice and you should review your particular circumstances with a competent attorney and/or accountant before forming a business.