10-step guide to starting a corporation as a small business owner

If you’re an entrepreneur looking to become a small business owner, one of the first things you’ll have to decide is how to structure your company. Business structure options include sole proprietorships, general partnerships, limited liability companies (LLC), and corporations. 

In this article, you’ll learn the steps to starting a corporation, including the pros and cons of forming one.

1. Consider the different types of corporations
2. Select a corporate name
3. Choose the directors
4. File articles of incorporation
5. Create corporate bylaws
6. Draft shareholders’ agreement
7. Maintain corporate minutes
8. Issue shares of stock
9. Get an Employer Identification Number
10. Obtain required licenses and permits

1. Consider the different types of corporations

A corporation is a business structure that allows owners to establish their company as a separate legal entity. Incorporated companies enjoy “corporate personhood,” meaning that, like a person, they have the right to enter into contracts, loans, and borrow money. Because of this, the owners and shareholders of a corporation are not personally liable for its debts and obligations.

When starting a corporation, there are three main types of corporations to choose from: 

• C corporation (C-corp) is the most basic corporation, which can have unlimited shareholders, and you can list your company on the stock exchange and become public. The ability to sell shares of ownership is often particularly attractive to companies seeking significant investments from multiple investors.
• S corporation (S-corp) is unique because it’s not a type of business structure. Instead, it’s a type of elected tax status. S-corps can pass through business income to their personal tax returns to avoid double taxation, which means shareholders will pay income tax on their share of the company’s profits. 
• B corporation (B-corp) is when a for-profit business has a social and environmental responsibility and receives a certification from B Lab, a global nonprofit network. B-corps may have to report regularly to authorities to show their mission’s progress. 

When setting up a corporation, owners do not need to choose between a C-corp or an S-corp. All businesses begin as a C corporation. After registering as a C-corp with their state’s Secretary of State’s Office, owners can elect to become an S-corp by filing IRS Form 2553, Election by a Small Business Corporation.

2. Select a corporate name

While it may seem minor, choosing the right name for your corporation is a crucial step. The name of your corporation must not match or be similar to that of an existing corporation. Check with your local secretary of state’s office to see the availability of your proposed name.

Additionally, if you want to conduct business under your corporation’s name, check with the US Patent and Trademark Office (USPTO) to ensure the trademark or service mark is available. You might consider talking to an attorney or receiving legal advice for help with the trademarking process.

You should also check to see if the domain name associated with your chosen business name is available. Perform a search of local directories to see if any local businesses currently operate with the same or a similar name.

3. Choose the directors

The next step is to appoint the directors, who are responsible for overseeing the direction of the company by making high-level decisions and ensuring it operates ethically. The number of directors you appoint varies depending on state regulations — states require only one, while others may require a few. 

You can also appoint a temporary board of directors and then change later. Essentially, corporations have a two-level structure: 

• Ownership level is the first level, which features the shareholders, who own a corporation. 
• Active management level is the second level, which features a board of directors and corporate officers.

Officers and directors do not necessarily have to be shareholders, although they can be. Typically officers and directors may double as shareholders in smaller companies, but not in larger ones.

4. File articles of incorporation

Your business will also need to file the articles of incorporation which document the formation of a corporation. While some states have stricter requirements, articles of incorporation generally outline necessary company information, like the business’s name, street address, and the amount and type of stock issued.

You have to prepare your articles of incorporation, have the incorporator sign them, and file them with the secretary of state in the state where you incorporate your business. When registering, you will also need to pay a filing fee and obtain an extra certified copy of the document.

5. Create corporate bylaws

The next step to starting a corporation is to develop corporate bylaws. Bylaws are some of the most important documents for a corporation because they set forth the rights and duties of the shareholders, directors, and officers, as well as outline how the corporation will operate.

Not all states require corporations to draft corporate bylaws, but you should consider developing them either way. Check with your local secretary of state’s office to see if corporate bylaws are required in the state in which you plan to incorporate your business.

6. Draft shareholders’ agreement

After that, you can prepare and execute a shareholders’ agreement, which is optional. A shareholders’ agreement restricts who can become a new shareholder and sets provisions for how existing shareholders can exit the corporation and sell their shares. 

Small companies often choose to draft a shareholder’s agreement to avoid disagreements and protect profitability.

7. Maintain corporate minutes

Next, your business needs to maintain corporate minutes, which document the meetings of shareholders and the board of directors. They allow the corporation to formalize its appointment of board members, officers, and other relevant resolutions, such as the decision to obtain a federal ID number, open a corporate bank account, and choose a tax status. You should use minutes to record actions during all board and shareholder meetings.

8. Issue shares of stock

Prepare and execute stock certificates, and update the corporation’s share ledger. The stock ledger records who owns shares and how many each person owns. Corporations have to keep track of how many shares they issued, who owns them, and how many are outstanding.

9. Get an Employer Identification Number

The Employer Identification Number (EIN) is basically the corporation’s Social Security number. Social Security numbers can only be issued to people, whereas the IRS issues EINs to businesses.

This number is necessary to open a corporate bank account and file taxes. Some of the questions on the EIN application have tax implications, so it might be a good idea to consult an attorney or tax professional before registering. Owners can obtain an EIN by submitting an IRS Form SS-4.

10. Obtain required licenses and permits

The last step for starting a corporation is to determine if your business needs any permits or licenses to operate. These will vary depending on your industry and location due to different city, county, state, and federal laws. 

Contact your state and local government to understand if you need a permit or license to operate, and check the US Small Business Administration website to find out if you need permits or licenses specific to your industry.

Benefits of starting a corporation

Why should you create a corporation? If you’re still not set on creating a corporation, there are some benefits this business structure offers.

Limited liability

One of the most significant benefits of corporations is that they offer personal liability protection to shareholders. Owners are only responsible for the amount they invest in the company, and their personal assets are not subject to seizure. 

This is different from sole proprietorships and general partnerships, where owners are personally responsible for the debts and obligations of the company.

Credibility

Registering as a corporation can make your business appear more credible to:

• Potential customers
• Employees
• Partners
• Vendors
• Investors

Additionally, many investors are hesitant to work with companies that do not have a corporation or LLC status because the lack of liability protection puts the investors’ funds at greater risk. So, registering as a corporation could also make you more legitimate to investors. Businesses can also sell stock to raise capital.

Unlimited life and transferable ownership

Corporations have an infinite life. If an owner passes away or wishes to sell their share of the company, the business will still exist and can continue to do business. Ownership is also transferable. There are some restrictions for S-corps, but owners can generally sell or pass shares to another person or business.

Tax advantages

Electing corporation status offers numerous tax advantages. For instance, owner-paid health insurance premiums are tax-deductible. Owners can avoid paying Social Security, Medicare, and workers’ compensation taxes, which corporate income is not subject to.

Downsides of forming a corporation

Although corporations can offer numerous benefits, there are some disadvantages potential owners need to consider.

Cost

The fees to register a corporation vary from state to state, but they often cost a couple hundred dollars. This is different from a sole proprietorship, which exists automatically without owners having to pay any filing fees. 

In addition to filing fees, you’ll have to pay for things like business license fees. And you’ll have to do this in every state, and potentially every county, in which you operate.

Administrative duties

There is a lot of paperwork involved in operating a corporation. Again, this varies from state to state, but you may need to file annual reports or other similar documents to remain compliant. Other things you’ll need to keep on file include:

• Certificate of incorporation
• Corporate bylaws
• Certificate of good standing if operating in another state
• Corporate minutes

If there are only a couple of owners involved in your small business—such as yourself and one or two others—then the administrative upkeep may not be worth it, and you may be better off selecting another business structure.

Start your business with confidence 

While the process for incorporation is complicated, there are many benefits to doing so. If you elect this business structure, it’s vital to fulfill corporate requirements in order to maintain corporate personhood and liability protection.

Make sure you perform due diligence when filing and seek legal assistance if needed. If you register correctly, choosing a C-corp structure and maintaining proper documentation could put your company in a position for long-term success. Consider accounting software, like QuickBooks, to keep your business finances organized and future-proof.