In this article, you will learn:
The first step when starting a business is to decide the type of business entity that you should establish. Most jointly owned firms and large-scale business entities adopt a corporate business structure. This is because it possesses five core attributes. These include legal personality, limited liability, transferable shares, delegated management under a board, and investor ownership.
This type of business structure enables entrepreneurs to transact easily. Further, it lowers the costs of conducting business.
Furthermore, a corporation offers liability protection to owners and shareholders. However, it is the most complicated of all business structures. The other types of business structures include sole proprietorships, general partnerships, and Limited Liability Companies.
Each business structure has its own pros and cons. However, in this article, we will discuss the pros and cons of the corporation and how to start a corporation?
What is a Corporation?
A Corporation is a separate legal entity owned by shareholders. This means that the shareholders are not legally liable for any actions and debts that a business incurs. Furthermore, the shareholders do not have a direct right to the money or any other assets of the corporation.
They only receive dividends if the directors of the company choose to distribute the same. Besides this, the shareholders receive nothing from the corporation until they sell their share in the company. Also, the shareholders elect one or more individuals to serve on the board of directors.
Thus, a corporation’s form of business structure is governed by the board of directors. The board gives consent to major business decisions, sets various policies and procedures, and appoints executives.
These executives hold positions such as president, secretary, and treasurer. They are the only ones who have the authority to put signatures on contracts and operate the corporation on a daily basis.
Typically, all corporations are established as C Corporations. The C Corporation However, a special type of corporation known as S Corp is established. This is to avoid the double-taxation drawback of regular C Corps.
Benefits of Corporations
One of the advantages of a corporate form of business structure is that the owners of the firm have limited liability. This means that the company’s creditors have a claim only on the assets held in the name of the corporation itself. They do not have any claim against the personal assets of the shareholders.
This is in contrast to the liability of the sole proprietors and general partners. In these types of business structures, the owners are personally liable to the creditors.
Transferability of Shares
Another basic characteristic of a business corporation is that the shares held in ownership are fully transferable. Thus, the feature of transferability allows a business corporation to carry out business without any interruption. This is because such transferability avoids the challenges that partnerships, cooperatives, mutuals encounter. For instance member withdrawal.
Thus, the ease with which the share transferability takes place enhances the liquidity of the shareholder’s interests. This means that they can maintain diversified investment portfolios quite easily.
Remember, the fully transferable shares do not necessarily mean that such shares are freely tradeable as well. This means even if the shares are transferable, they may not be tradeable in public markets without restriction.
In the case of a business corporation, the board of directors elected by the firm’s shareholders have the principal authority over the corporate affairs. This means that the most fundamental decisions of a business corporation are delegated to the board of directors.
The board of directors has four basic characteristics:
- They are separate from the operational managers of the corporation
- The members of the board are elected by the firm’s shareholders. This ensures that the company’s board remains responsive to the interest of its owners.
- The board is separate from the firm’s shareholders. This feature avoids the need to inform and obtain the consent of owners for all business decisions. Though the board takes the consent of the firm’s owners for the fundamental decisions regarding the firm.
- The company’s board has multiple members which facilitate mutual monitoring and decision-making.
A business corporation is an investor-owned firm. This means that the right to control and receive the firm’s residual earnings are proportional to the amount of capital the owner contributes to the firm.
Disadvantages of a Corporation
Costly and Time-Consuming
It is costly and time-consuming to start and operate a business corporation. This is because incorporating a business involves start-up costs, operating costs, and tax costs. These costs are not required to form other business structures.
For instance, you need to pay an initial one-time charter fee during the formation of a corporation. The fee depends upon the number of shares your corporation’s articles of association authorizes to issue.
Thus, the charter fee ranges from a minimum of $75 to a maximum of $2525. Besides the initial one-time charter fee, your corporation is also required to file an annual report and an annual renewal fee. Such a fee ranges from a minimum of $100 to a maximum of $1700.
Another disadvantage of a corporate business structure is that it is subject to double-taxation at times. This means that your corporation’s income is taxed when it makes a profit as well as when dividends are paid to shareholders.
However, this happens only with C Corps and not S Corps.
A business corporation is a type of business structure that is highly regulated by Federal laws, State laws, and local agencies. Thus, such a business structure has to undertake record-keeping that involves too much paperwork.
Steps to Form a Corporation
Choose a Business Location
The first step to start your business corporation is to choose your business location. The business location you choose would depend upon a number of factors. These include the location of your target market, business partners, and your personal preferences.
Besides this, you would also consider various costs, benefits, and regulations stipulated by various government agencies. Therefore, the following are some of the points that you need to consider before choosing a location for your corporation.
- Region-specific expenses like property values, rentals, government licenses, and fees, etc.
- Local zoning requirements like the commercial or residential status of a location, types of businesses prohibited, etc
- State and local taxes like income tax, sales tax, property tax, and corporate tax
- Local and state government incentives. These include special tax credits and incentive programs related to energy efficiency, job creation, etc
- Federal government incentives
Choose Your Business Name
The next step in launching your corporation is to choose a business name. Your business name should be such that it reflects your brand identity and matches your business offerings. Further, you need to protect your business name once you finalize the same. This can be done by getting your business name registered.
Now, there are four ways to get your business name registered. Each way of registering your business name has a unique purpose. At times, you may need to adopt a specific way of getting your business name registered. This may depend upon your business structure and location. Such a situation may arise as a part of meeting a specific statutory regulation. The following are the four ways to register your business name:
The entity name is the name with which the state recognizes your business. Entity names can protect your business name at the state level. That is, the state may ask you to register a legal entity name. This may depend upon your business structure and location.
Further, every state may have its own rules regarding the entity name that your business corporation can use. Most of the states do not allow you to register an already existing name. So, this protects your business and some other business from operating under the same name.
You can use a trademark if you want to protect the name of your business, goods, and services at a national level. Furthermore, each state has its trademark infringement lawsuits which can turn out to be costly. However, your business has to adhere to such lawsuits.
Therefore, you need to cross-check your prospective business product and service names with the official trademark database.
Doing Business As (DBA) Name
DBA is also known as a trade name, assumed name, or a fictitious name. You might have to get your DBA registered with the state, county, or city in which your business is located. It is important to note that getting your DBA name registered does not tantamount to legal protection of your business name. However, many states ask you to register your DBA in case you use one.
There is a need for you to use a DBA in certain business structures. However, if you are not required to register a DBA, you may still do so. This is because a DBA allows you to conduct business under an identity that is separate from your personal or entity name.
You can start your online business corporation by registering the domain name of your website. Once you register your domain name, no other business can use it till the time you own the domain name.
Thus, registering your domain name is a good practice. This is because it is a great way to protect your brand presence online.
Register Your Business
Determine If You Need Registration
As mentioned above, your business location and structure determine how you would get your business registered. Most of the small businesses just need to register their business name with state and local governments for business registration.
Furthermore, you do not need to register in case you are carrying out business yourself, using your legal name. However, this way you cannot avail of benefits like personal liability protection, legal, and tax benefits.
Register With Federal Agencies
There is no need for you as a business to register with the Federal government in order to become a legal entity. Instead, you just need to file for a Federal Tax ID with the Federal government.
Sometimes, small businesses register themselves with the Federal government. This is done to protect their trademark or tax-exempt status. Thus, you need to file with the United States Patent and Trademark Office in case you want a trademark for your business, brand, or product name.
On the other hand, you need to get your business registered with the IRS as a tax-exempt entity. This is in case you want to obtain the tax-exempt status for your non-profit corporation.
Finally, if you want to establish an S Corp, you need to file form 2553 to get registered as an S Corporation under section 1362.
Register With State Agencies
You would have to register with the state in which you carry out your business operations. This is in case you are an LLC, corporation, partnership, or a non-profit corporation.
But, before registering with any state you must fulfill certain conditions. Only then you would be considered as an entity that conducts business activities in that state. These conditions are as follows:
- Your business must have a physical presence in the state
- You frequently conduct face-to-face meetings with your customers in such a state
- A large part of your company’s revenue comes from such a state
- Any of your company’s employees work in such a state
It is important to note that certain states may allow your business to register online. While others require you to submit paper documents physically or via mail.
In addition to this, most of the states want you to get registered with the Secretary of State’s Office, a Business Bureau, or a Business Agency. Besides the above-mentioned points, you also need to undertake the following to get your business registered with a state agency.
Hire a Registered Agent
You’ll require a registered agent in your state before getting your business registered with a state agency. Provided that your business is an LLC, Corporation, Partnership, or Non-Profit.
Your registered agent would receive all the official papers and legal documents on behalf of your business corporation. Remember, your registered agent must be located in the state where your business is registered.
Apply for Foreign Qualification
At times, an LLC, corporation, partnership, or non-profit corporation carries out business activities in more than one state. However, such an entity has established business in a single state itself. So, to carry out business operations in the other states, the business entity needs to file for a foreign qualification in all such states.
Accordingly, the state in which the entity forms its business would consider business to be domestic.
However, all the other states would consider the business entity to be a foreign firm. This means that the foreign qualification of your business entity informs the state that a foreign business of your entity is active there.
So, as a firm certified as a foreign business, you need to pay taxes and the annual report fees in both states. That is, the state in which business is formed and the state in which the business is qualified as foreign. So, you need to file a certificate of authority with the state in which you want to qualify as a foreign business.
In addition to this, many states demand a certificate of good standing. This is required from the state in which your business is established. Besides this, you also need to submit a filing fee with each state. And the amount of such a fee depends on the state and the business structure.
Submit State Documents and Fees
The total cost to get your business registered would vary depending upon your state and business structure. Mostly, the cost to register your business would be less than $300. Therefore, while filing documents with the state and submitting the requisite fee, you would need the following details:
- your business name
- business location
- management structure, ownership, or directors
- details of the registered agent
- number and value of shares in case you are a corporation
Further, the documents to be submitted to the state in case of a business corporation include:
Articles of Incorporation
Articles of Incorporation is also referred to as the Certificate of Incorporation. It is a legal document laying out a basic summary of your business. The information includes your company name, business purpose, number of shares offered, the value of shares, directors, and other officers.
Remember, every state requires articles of incorporation whenever your business gets incorporated.
Bylaws or Resolutions
Bylaws are also referred to as resolutions for non-profits. These are the documents required for the internal governance of a corporation. Such documents outline the following information:
- the manner in which business decisions are undertaken
- duties, powers, and responsibilities of officers and shareholders
It is always advised to create bylaws or resolutions for your business even if your state does not demand it. This is because such a document protects you and your business legally.
Remember that some states mandate your business to register your DBA that is a fictitious or trade name. This is in case you use a DBA.
Register With Local Agencies
Generally, there is no need for you to register with local agencies for business incorporation. However, you may have to register with local agencies if you are an LLC, corporation, partnership, or non-profit corporation. Such registration is undertaken to obtain licenses and permits from a given city or county.
Therefore, to know the registration licensing and permitting requirements of local agencies, visit local government websites.
Obtain Federal and State Tax ID Numbers
To pay State and Federal taxes, you need to have a State Tax ID and Federal Tax ID numbers. These tax ID numbers act as a personal security number for your business. Therefore, adopt the following practices to obtain your Federal and State Tax ID numbers.
Federal Tax ID Number
Federal Tax ID number is also referred to as Employer Identification Number (EIN). Your business corporation needs a Federal Tax ID for a variety of purposes These include paying Federal taxes, opening a bank account, getting employees on board, and filing for business licenses and permits.
Thus, you should obtain your Federal Tax ID number immediately after you register your corporation. Remember, applying for an EIN is absolutely free. Now, it is mandatory to obtain a Federal Tax ID number in case your business does any of the following:
- pays employees
- functions as a corporation or partnership
- submits tax returns for employment, excise, or alcohol, tobacco, and firearms
- makes use of a Keogh Plan (a tax-deferred pension plan)
- engages with certain types of organizations like trusts, non-profit organizations, estates, etc
Thus, to apply for EIN, you can use the IRS assistance tool. This tool will provide you with guidelines on how to use the EIN assistance tool. Further, it will also let you know the eligibility criteria to obtain EIN.
Once your EIN application gets verified, your 9-digit Federal Tax ID becomes available.
State Tax ID Number
Your business must obtain a State Tax ID number if it is required to pay state taxes or hire employees. Remember, businesses with employees must obtain a State Tax ID for each state in which they hire employees or pay taxes. Besides this, you can also use State Tax ID numbers for other purposes.
These include obtaining protection for your legal identity as a sole proprietor. It is important to note that the tax obligations vary in each state. Therefore, you need to check for state tax obligations on the state’s website. Furthermore, you also need to have an understanding of the state’s laws pertaining to income and employment taxes. Such an understanding would help you to know whether you need a State Tax ID or not.
Apply for Licences and Permits
Your business needs to obtain certain licenses and permits both from Federal and State agencies. The requirements and fees for various licenses and permits depend on the type of business activity, location, and government rules.
Federal Licenses and Permits
You need to obtain a Federal license or permit if you are pursuing a business activity that is regulated by a Federal agency. There is a list of business activities that need to apply for a Federal license or permit with the requisite Federal Agency. These include:
- alcoholic beverages
- firearms, ammunition, and explosives
- fish and wildlife
- commercial fisheries
- maritime transportation
- mining and drilling
- nuclear energy
- radio and television broadcasting
- transportation and logistics
Now, each of these business activities is regulated by a specific agency responsible for issuing a license or permit. Further, the fees and other requirements to get a Federal license or permit also depend on the type of business activity.
Thus, you must get in touch with the issuing agency to know details about the business license cost.
State Licenses and Permits
The need to obtain state licenses and permits depends on two factors. These include:
- the type of business activity you pursue
- a business location
Furthermore, the requisite fees attached to your business license would also vary. It is important to note that the states regulate a relatively wider range of business activities than the Federal government. Few of these activities include construction, auctions, drycleaning, farming, plumbing, restaurants, retail, and vending machines.
Remember, certain licenses and permits expire after a specific period of time. Therefore, you need to keep a check of the time when your license gets expired. In case your business license gets expired, renew the same.
This is because applying for the new one is a bit challenging. Thus, to know about your state, county, or city regulations and industry requirements, visit your state’s website.
Open a Business Bank Account
You need to open a business bank account once you are through with all the above-mentioned steps. Further, you must be ready to accept or spend business funds. The common business accounts include:
- checking account
- savings account
- credit card account
- merchant services account
Thus, you can open your business bank account immediately after you get your Federal EIN. But before that, you need to choose a bank with which you would open such an account. Consider the following points before opening a business checking and savings account with a bank:
- interest rates for savings and checking
- transaction fees
- minimum account balance fees
- rates of interest for lines of credit
- introductory offers
- early termination fees
In case you want to open a merchant services account, consider:
- discount rates
- transaction fee
- address verification service fee
- ACH daily batch fee
- monthly minimum fee
Besides this, the following are some of the common documents you need to open a business bank account:
- Employer Identification Number (EIN) or a Social Security Number if you are a sole-proprietor
- Company incorporation documents
- Business license
- Ownership agreements
Get a Business Insurance
Business insurance provides you protection from the unanticipated costs of operating your business. Your business may have to incur such costs due to unexpected events. These include accidents, natural disasters, and lawsuits.
In case you are an LLC or corporation, you can protect your personal property from lawsuits. You can do this via business insurance. However, such protection is limited.