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A corporation is a legal entity that removes the legal liability of a stockholder from being personally liable for corporate debts. Each state has individual laws regarding corporations; however, many states follow the Model Business Corporation Act.
A few reasons why someone would want to form a corporation include:
- Additional protection from any legal liabilities
- Easier to attract investors with the ability to issue stock
- Deaths of stockholders/officials don’t change the structure of the corporation
- Stock ownership is easily transferable
Types of Corporations
In this section, we’ll go over three common corporations and their use cases:
- S corporation
- C corporation
- Nonprofit corporation
An S corporation (S corp) is designed to avoid the double taxation issues of C corporations. Taxes can be passed directly through the owners’ personal income, avoiding corporate tax rates. Most states recognize S corporations the same way that the federal government does and tax shareholders according to those laws.
Since each state can set its own laws for corporations, not all S corporations are equally taxed. For example, some states do not recognize S corporations, taxing them like C corporations. In other cases, certain states might tax S corporations in profits above a specified limit.
A C corporation (C corp) is a type of corporate structure that offers the strongest legal protection to its owners. Filing as a C corporation is a legal procedure that allows corporations to profit and be taxed accordingly. Although C corporations protect their owners from personal liability, they need extensive record-keeping, reporting, and operational processes.
C corporations are structured so that if a shareholder decides to leave the company and/or sell their shares, it can remain undisturbed. The lives of shareholders and the corporation are completely independent of each other. Because of this structure, C corporations are a great choice for medium- to high-risk businesses or businesses that plan to be sold or “go public.”
A nonprofit corporation is designed to do charitable, religious, educational, literary, or scientific work. Nonprofit corporations work for the public and can receive tax-exempt status, which means they do not pay state or federal taxes for any income or profits.
In addition to following rules that are very similar to a C corporation, they also follow a special set of rules about what to do with any profits.
How do you start a corporation?
Although some steps may vary from state to state, these are the 10 basic steps for starting a corporation:
Step 1: Name Your Corporation
When naming your business, you will want to choose a name that reflects your brand’s unique identity. You want to think about a few things when coming up with your business name, some of which are legally required, depending on your business location and structure.
In this next section, we’ll review the four things to think about when naming your corporation, specifically:
- Entity name
- “Doing business as” (DBA) name
- Domain name
Your business entity name is how you and the state will identify your business. Some states may have rules limiting how you can choose your entity name, including the usage of company suffixes. Most states will not allow you to register a name that’s already registered by another company. Additionally, some require that the entity name reflects the business you have in some way.
A few notes when coming up with your corporation name:
- Whichever name you settle on must include the word “Corporation,” “Incorporated,” or an abbreviation of one of the two.
- Specific words are off-limits if you don’t offer the service directly. For instance, you cannot include a professional designation, such as “Engineering” or “Attorney,” unless you have licensed members delivering those services.
- There’s typically a site where you can search your name choices to see whether what you have is too similar to current businesses. You will need to eliminate any such names from your list of possibilities.
- The name cannot suggest that it is associated with any government agency or include anything suggesting that it will be engaged in a business that is illegal.
When it comes to a trademark, you’ll want to look at the state and federal levels. At the state level, you can verify whether your name or logo is trademarked by visiting their online business portal. At the federal level, you should check your prospective business name in the A official trademark database.
Although more costly and time-consuming to obtain, federal trademarks offer far more protection than a state trademark. Since state trademarks only protect your trademark in the registered state, you would lose nationwide protection. A federal trademark is especially beneficial to corporations that expect to do business outside of their home state.
“Doing Business As” (DBA) Name
Registering your business with a DBA name doesn’t provide any legal protection by itself. DBA names are known as trade names, fictitious names, or assumed names. They can be registered with the state, county, or city in which your city is located.
A DBA name is determined by your location, so multiple businesses in the same state can have the same business name. Although multiple businesses can use the same DBA name, it’s important to ensure that you’re not violating any trademarks since they are held at the federal level. DBA names enable you to conduct business under a different identity than your own. Additionally, you can open a business bank account with a DBA and obtain a federal tax ID number (EIN).
A domain name is the web address that visitors will use to access your website, and someone like ZenBusiness can help you register your domain name. Perform a quick search to make sure the name is available, and then reserve it before someone else takes it.
Step 2: Appoint Directors
Once you’ve decided on a business name, you will need to appoint a board of directors. The board of directors is a group of elected individuals in your company. They essentially establish corporate governance and oversee organizational strategies, investments, profits, and more. The number of directors varies from state to state, and there are no strict rules for how to structure your company’s board.
Officers or shareholders of common stock elect directors. Appointing a director is important because some states require their addresses and the names of directors but also because of their important work. They handle strategies and corporate planning, which can benefit your corporation in the long run. Most states require at least one director to be appointed; however, the rules vary from state to state. Although directors play an important role in a corporation, they do not have to be owners.
Step 3: Choose a Registered Agent
The government requires an official address to send correspondence to an appointed registered agent. A registered agent acts as the middle man between your corporation and the state. Depending on your state, you can appoint yourself or even your business as a registered agent. Registered agents are necessary to ensure that businesses can be notified in the event of a lawsuit. The physical address must be located in the state and open during business hours so that the corporation can be reached.
Although you can take a do-it-yourself approach when appointing a registered agent, there are many reasons in which you might choose an outside registered agent. For many corporations, it can be difficult to add another set of paperwork. By choosing a registered agent service, you can have someone else handle the annual paperwork for a relatively small fee. In addition, outsourcing the registered agent role can be a great option for small, web-based corporations that do not have a physical location.
It’s important also to consider that registered agents must be available during normal business hours throughout the year. If the registered agent is not around when they should be, the corporation will run the risk of a lawsuit. To avoid this, a company would need all-day, year-round availability, which is why many corporations choose a registered agent service. Hiring a registered agent service can help corporations manage paperwork, have a physical address, and operate without any privacy concerns.
Step 4: File the Certificate of Incorporation/Articles of Incorporation
The Certificate of Incorporation, or Articles of Incorporation, is a legal document that must be filed with your state’s business filing agency. It is used to establish your corporation as a C corporation or an S corporation. Before you file the Articles of Incorporation, you’ll need to choose a corporate name and registered agent. Some states require you to designate the type of corporation (e.g., C corp, S corp). The document asks for basic business information (company address and the number of shares) and is used to establish your corporation legally.
Each state can have slightly different rules for the Articles of Incorporation. Forms can be found by visiting your state’s business filing agency online.
Most states will require this information:
- Corporation’s name: This is your company’s legal name and typically ends in “Corp” or “Inc.”
- Corporation’s address: This is the principal operating address. Your corporation’s operating address must be in the state that you filed within.
- Registered agent: You must include your registered agent’s name and operating address.
- Business purpose: This is a statement authorizing the business to engage in any lawful purpose. Some states require a specific description of your business’s services and products.
- Directors and officers: Certain states require that you provide the addresses and names of directors and officers.
- The number of shares: The number of shares needs to be specified. Many businesses decide to leave some shares unissued in the hope of expanding and adding more shareholders in the future.
- Class of shares: Depending on your corporation type, you will need to list your class of stock. C corporations can have multiple (common and preferred) classes of stock. S corporations can only have one class of stock.
- Incorporator: This is the person who files the Articles of Incorporation. The Articles of Incorporation should be filed in the state where the corporation is located. Most states require that you file the Articles of Incorporation with the Secretary of State’s office; however, this can vary from state to state. Typical filing fees can be between $50 to $800. It just depends on your state’s filing fees. Be sure to visit your state’s online business portal to know where you should send your Articles of Incorporation.
Step 5: Create Corporate Bylaws
Corporate bylaws are legal documents written and adopted by the owners and board of directors when a corporation is incorporated or formed. Although corporate bylaws may vary from corporation to corporation, here are some of the basic components:
- Business name, purpose, and location
- Board of Directors
- Conflict of Interest
- Rules to any amendments to bylaws
- How the company will operate
- Duties and responsibilities of the owners
- Internal management structure
- Shareholder ownership rights
- Annual Meetings
- Rules for selecting and removing directors and officers
Even though corporate bylaws are not legally required in every state, they are very beneficial to companies. Corporate bylaws are beneficial because they set the guidelines and processes that the owners and board will use to run the business. Additionally, they define the structure of the corporation by specifying the rights, duties, and responsibilities of all members. Furthermore, corporate bylaws set the rules for the corporation. They note the rules that govern the corporation and note how those in charge are nominated, elected, and removed.
Each corporation also needs to set up a comprehensive corporate records book, which should include important papers. These important papers can include the minutes for director and shareholder meetings, stock certificates, business transactions, and more. Lastly, when the corporation drafts the corporate bylaws, they should consider rules regarding general operations, stock, shareholders, and more.
ZenBusiness helps corporations create their own corporate bylaws with a customizable template. Having a well-written, comprehensive list of corporate bylaws is crucial to starting a functional corporation. The ZenBusiness template can help you create an all-encompassing list, without the added stress of wondering if you forgot something important.
Step 6: Draft a Shareholder Agreement
A shareholder agreement is an arrangement among a company’s shareholders that describes how the company should operate and defines the shareholders’ rights and obligations. Shareholder agreements, along with their rights and any of their transactions, should be stored with the other corporate documents. The shareholder agreement is intended to ensure that shareholders are treated fairly and that their rights are protected. It also enables shareholders to make decisions about potential shareholders in the future. Additionally, it provides a safeguard for minority positions. Most shareholder agreements will include:
- A preamble, which identifies the company and its shareholders
- A list of recitals (rationale and goals) for the agreement
- Optional vs. mandatory buying-back of shares by the company if the shareholder wants to give up their share
- A right of refusal clause explains how the company has the right to purchase a shareholder’s securities before they sell to an outside party
- A fair price for shares, which will be recalculated annually or via a formula
- If there is an insurance policy, it could be explained in full
Corporations should have a shareholder agreement because it can ensure a secure corporation. Without a shareholder agreement, you could run into trouble if the business venture doesn’t go as planned or shareholders are caught up in personal issues. When you start doing business, it’s important to draft a shareholder agreement to determine the corporation’s funding, set rules for removing inactive shareholders, and resolve any disputes. Essentially, a shareholder agreement protects the corporation and involved individuals.
Step 7: Issue Shares of Stock
Issued shares are authorized shares sold to and held by company shareholders. Company’s must record the number of issued shares on a balance sheet and list the shares under owners’ equity or capital stock. Companies must then list the number of issued shares to the Securities and Exchange Commission (SEC) in their quarterly filings. Issued shares include the stock that the company publicly sells, which generates capital, and the stocks given to insiders as part of their compensation packages. Stock shares are only issued once.
After they are first issued, investors can sell shares to other investors. Companies can also buy back their own stock. Afterward, the shares are listed as “issued” even though they will become “treasury shares.”
Facts about issued shares:
- They may be shown in the company’s annual report.
- They are used when calculating the market capitalization and earnings per share.
- They help investors and analysts measure the company’s value.
Private vs. Public Companies
Private companies are privately held, most commonly by the company’s founders, management, or private investors. Although private companies cannot rely on selling stocks or bonds, they may still be able to sell a limited number of sales without registering with the SEC. They don’t have to file disclosure statements with the SEC. As a result, they cannot dip into public markets and must turn to private funding.
On the other hand, a public company has sold all, or at least a portion, of itself to the public. Public companies sell this during the initial public offering (IPO), which means that shareholders claim part of the company’s assets and profits. Public companies can tap into public markets and sell stocks and bonds to raise capital. These companies must file quarterly earnings reports to the SEC since they trade in the U.S. stock exchange. The SEC promotes disclosure and sharing of market-related information, fair dealing, and protection against fraud. Public companies must track and report stock to the SEC to avoid repeating a complete stock market crash.
Step 8: Apply for Necessary Business Permits or Licenses
The next step is to apply for all necessary licenses and permits from both federal and state agencies. Requirements and fees will vary based on location, business activities, and local government rules. Depending on your business activities, your corporation may need federal licensing or permits. Common business activities that require federal permits and licenses include agriculture, alcoholic beverages, fish and wildlife, radio and television broadcasting, and more.
Licenses and permits from the state, county, or city depend on your business activities and location. Every state requires your corporation to have at least one type of business license. States typically regulate a larger range of business activities when compared to the federal government. Common state-regulated activities are plumbing, restaurants, retail, and dry cleaning. Depending on your state, county, and city, you might need specific requirements, so it’s recommended to visit your state’s website.
Step 9: File for an EIN and Review Tax Requirements
An Employer Identification Number (EIN) is used to identify the business entity with the federal government. Corporations may need an EIN and must apply online. Applying for an EIN is a free service that is offered by the IRS. Applications can be completed by mail, fax, or online.
You will need to apply for an EIN if any of the following statements apply to your corporation:
- The Secretary of State gives a new charter to your corporation
- Your corporation changes to a sole proprietorship or a partnership
- A new corporation is developed following a statutory merger
- If you become a subsidiary of a corporation
Step 10: Submit Your Corporation’s First Report
Some states will require you to submit an Initial Report after forming your corporation. Your corporation will need to pay fees shortly after formation or incorporation. Typically, you will need to file the initial report within 30 to 90 days after registering the corporation with the state.
Many states do not require an Initial Report. The Initial Report is due to the Secretary of State. Since no state is the same, the Initial Report fees may vary. In Washington, for example, the Initial Report fee is $10. Typically, you will need the corporation’s name, registered agent information, the address of your principal office, contact information, the nature of the business, and the names of appointed directors, members, stockholders, or trustees.
Check with the state where your corporation is registered to learn the rules for filing your first report. ZenBusiness can help you file your Initial Report and the annual reports following it.
What are the costs of forming a corporation?
Common fees and expenses to expect:
- Article of Incorporation filing fee: $100 to $250
- Government filing fee: $50-$200 (Depending on which state you live in and the type of business you have, you may have to pay additional fees to your state.)
- Attorney fee: $50 to $300 per hour
- Tax preparation fee: Approximately $1,000 for the preparation of a corporate return
Additionally, you should expect annual fees, which will change depending on the state. Corporations usually have to pay a few hundred dollars. Several factors will impact the cost of forming a corporation. If you are forming a nonprofit organization, you might find fees between $20 to $195. Otherwise, annual fees fall somewhere between $45 to $315, depending on your state. When budgeting for annual fees, you should also consider recurring costs, like an annual report.
ZenBusiness offers solutions to help you get your corporation up and running quickly. We offer low-cost services and expert support to help form your corporation and remain compliant with state and federal laws. Our affordable plans can help you eliminate any first-time business difficulties.
What are the benefits of a corporation?
Forming a corporation can help you save money in the long run and protect your business. The benefits of forming a corporation include:
- Protect personal assets from any business risks
- Establish an official business in the eyes of your state and potential clients/customers
- Recognized outside of the U.S.
- Allows stock to be issued
What are the disadvantages of a corporation?
Although there are many advantages to forming a corporation, there are also some cons. The disadvantages of forming a corporation include:
- Double taxation
Double taxation is notably one of the biggest disadvantages of a corporation. In the case of double taxation, a corporation is taxed at the corporate level, and if it’s distributed to shareholders, they have to pay taxes on it.
- Rigid management system
Corporations also come with a rigid management system, which means they will be made up of shareholders and a board of directors that will call the shots.
- More extensive reporting and bookkeeping
Although the rigid structure provides some direction to the corporation, it also comes at the cost of additional reporting and bookkeeping, making it a stricter form of business than other structures.
How is a corporation taxed?
C corporations are taxed corporate income tax on any corporate profits. In the eyes of the IRS, C corporations are recognized as separate taxpaying entities. Additionally, the owners of the corporation will also pay personal income tax on corporate profits. This creates the issue of double taxation.
On the other hand, S corporations report the corporation’s income and losses on their personal tax returns. As a result, S corporations’ taxes are assessed by their individual tax rates, ultimately avoiding the double-taxation conundrum.
Corporate taxes can be beneficial for business owners, as corporate tax returns deduct medical insurance and fringe benefits. Additionally, corporations can deduct losses more easily. Lastly, any earned profits can be left within the corporation, enabling corporations to plan taxes, leaving more room for potential tax advantages.
ZenBusiness solutions to help you get your corporation up and running quickly. We offer low-cost services and expert support to help form your corporation and remain compliant with state and federal laws. Our plans are affordable and can help you eliminate any first-time business difficulties.
- What is the processing time to form my corporation?
The processing time for forming a corporation varies by state, particularly when filing online or by mail. Be sure to visit your state’s site for processing times.
- Do I need a lawyer to form an S corporation or C corporation?
No. You can form a corporation yourself. There is no requirement to use a lawyer. You can find all the information you need to form your own corporation.
- Where should I form a corporation?
It is usually best to form your corporation in the state where your business is located. Unless the specifics of your business indicate otherwise, there are ordinarily no great advantages to forming your corporation in any other state.
- What is the difference between an LLC and a corporation?
An LLC is a limited liability company. LLCs are a legal entity separate from individuals, like a corporation. However, corporations are also tax entities. Corporations, for instance, are taxed differently than individuals.
- Is “Inc.” a corporation?
Yes. “Inc.” is the abbreviation for “Incorporated.” Incorporated companies are corporations. “Inc.” is a designator, similar to “Co.” or “Corp.”
- How do I dissolve my corporation?
Corporations can be dissolved in the state in which the corporation is located. To dissolve the corporation, you must fill out the Articles of Dissolution from your state. Depending on your specific state, they may require additional documents like a tax clearance certification.