A corporation is an entity separate from its owners in terms of tax and legal purposes. Stock and shareholders are common in most corporations.
It can be expensive and time consuming to start a corporation, but you will not be personally responsible for any legal issues that arise from the business.
The Key Takeaways
- Corporations shield owners from their business’s liability.
- To start a corporation, you need to name a board of director, decide what type of shares are needed, get a certificate of incorporation and file the incorporation.
- The paperwork and costs involved in forming a company are its main drawbacks.
How to start a corporation
Here are the seven steps of incorporation:
Select a Company Name and Address
Do a search for the corporate name to make sure it is unique. This will prevent future problems. Your business name will be filed as an entity in the state and as a trademark on the federal level. Both of these actions will help protect your business’s name in the future. 1
Choose a State to Incorporate in
There are many factors to consider, such as the cost of incorporation, tax rates and corporate laws.
Select a corporation type
Choose the right type of corporation to suit your business.
C Corp: Shareholders protected from corporate liabilities. The business pays taxes on its profits and the shareholders pay tax on dividends or profit-sharing.
S Corp: This requires registration with the IRS, and you can avoid double taxation that is associated with C corporations. You pay your taxes just like a sole owner or partner.
Consult your advisors and research the pros and cons of each before you make a decision.
Name Your Company Directors
A corporation must have a board. The articles of incorporation will need to include the director positions. You should check your state’s regulations regarding the number of required board members.
Select Your Share Type
Even private corporations offer a variety of shares to their shareholders.
- Shares with voting rights: Common share for company owners; usually, one share is equal to one vote.
- Shares without voting rights: Shareholders who do not have the right to vote are entitled to profit distributions.
- Preferred Shares: This group of shareholders receives distributions before the common shareholders and is also paid first in case the company becomes bankrupt. 3
Get Your Certificate of Incorporation
This can be obtained at the corporate filing offices of the states in which you have incorporated. The secretary of state’s department is responsible for completing this process.
How to file the incorporation
A lawyer or third-party service can help you complete the incorporation. You’ll still need a Registered Agent to complete your incorporation, no matter what option you choose. The registered agent acts as your company’s point of contact for the state.
The Pros and Cons of Starting a Corporation
Pros
- Reduces personal liability
- Tax benefits may be greater than you think
- Additional Financing Opportunities
- Easy to value for a sale
You can also find out more about Cons
- There are several legal processes that apply to applying
- Administrative responsibilities
- An annual filing fee is required
Pros Explained
Limits your personal liability. Corporations are separate legal entities from you. The company is responsible for any debts and lawsuits, not the owner. Consult an attorney if your business has the potential to be sued and think about incorporation. It is a good idea to have business liability insurance, even if you incorporate.
Has more tax benefits: Corporations often have lower tax rates and better tax benefits. Speak to your accountant regarding tax benefits.
More funding opportunities: Financing small businesses as a sole proprietorship, partnership or limited liability company can be challenging. A corporation is able to raise money and sell shares more easily than other types of business structures.
It is easier to value a business for sale. A company that does not have a corporate structure can be difficult to properly evaluate. The value of a business corporation will be determined by the business and not the owner. This makes it easier to sell.
Cons explained
There are several legal processes that you need to follow before you can successfully incorporate your company. They vary from state to state.
Ongoing Administrative Responsibilities: Based on the type of corporation you have, it’s likely that you will need to file articles and conduct annual meetings with your directors.
Annual filing fees required You’ll need to pay a fee each year to your state in addition to the initial filing fee.
Note:
It is important to make the right decision when deciding whether or not to incorporate. Consult your accountant, lawyer and business advisor to decide if it is right for your company. You can also get guidance from them.
FAQs (Frequently Asked Questions)
How easy is it to form a company?
It can be a complex process to form a corporation. Begin by submitting paperwork to the secretary of state in your state. You’ll also likely need to pay filing fee at the time of your application, and each year thereafter.
Anyone can start a company?
As long as you meet the legal and financial requirements you can start a corporation. Even if you are a single-person corporation, it is possible to fill all required roles. However, many people choose multiple shareholders, partners or owners.
