Corporations are the most complicated and regulated type of business entity. But while they may be the most difficult entity to create, they also offer the greatest liability protection for owners and shareholders.
Corporations are a separate and distinct legal entity from their owners. Incorporated companies enjoy “corporate personhood,” meaning that, like a person, they have the right to enter into contracts, loan and borrow money, sue and be sued, etc. Because of this, the owners and shareholders of a corporation are not held personally liable for its debts and obligations. A major drawback of corporations, however, is that they’re subject to double-taxation, in which the corporation is taxed once at the corporate level, and shareholders’ dividends are taxed again at the individual level.
The most basic corporation is known as a “C corporation.” C corporations can have unlimited shareholders and may become public and listed on a stock exchange. This makes them particularly attractive to companies seeking large investments from multiple investors.
The following is a step-by-step guide to creating a C corporation. To see other options for forming a business entity, including S corporations, see our video series on choosing the right type of business for you.
1. Select a Name
While it may seem like a minor detail, choosing the right name for your corporation is a very important step. The name of your corporation must not match or be similar to that of an existing business. Check with your local Secretary of State to see the availability of your proposed name.
Additionally, if you want to conduct business under your corporation’s name, check to make sure the trademark and/or service mark is available with the U.S. Patent and Trademark Office (USPTO). A basic trademark search can be done on the USPTO website; however, this search is fairly complicated and not necessarily conclusive. You might consider talking to an attorney about performing this search for you.
You should also check to see if the domain name associated with your chosen business name is available, and it’s recommended to perform a search of local directories to see if any local businesses are currently operating with the same or similar name that did not appear in other search results.
2. Draft and File Your Articles of Incorporation
Articles of incorporation are required to legally document the formation of a corporation. While some states may have more stringent requirements, in general, the articles of incorporation outline basic company information, such as the business’ name, street address, agent for service of process and the amount and type of stock issued.
You are required to prepare your articles of incorporation, have the articles signed by the incorporator and filed with the Secretary of State in which your business is incorporated. When filing, you will also be required to pay a filing fee and obtain an extra certified copy.
3. Create Corporate Bylaws
Not all states require corporations to draft corporate bylaws, but they are nonetheless essential to document your corporation’s purpose, operations and duties of its owners. Bylaws are some of the most important documents for a corporation, as they set forth the rights and duties of the shareholders, directors and officers, as well as outline how the corporation will operate.
Check with your local Secretary of State to see if corporate bylaws are required in the state in which your business is incorporated. But even if they’re not required, it is highly recommended that you draft and maintain bylaws.
4. Draft a Shareholders Agreement
If desired, be sure to prepare and have the shareholders execute a shareholders agreement. A shareholders agreement is an agreement often utilized by small, “close” corporations that want to restrict who can become a new shareholder and set provisions for how existing shareholders can exit the corporation and sell their shares, among other provisions.
5. Maintain Corporate Minutes
Corporate minutes document the meetings of shareholders and the board of directors and allow the corporation to formalize its appointment of board members, officers and other important resolutions, such as the decision to obtain a federal identification number, open a corporate bank account, choose a tax status and many other tasks described therein. Minutes must be used to record actions during all board and shareholder meetings.
6. Issue Shares of Stock Purchased by Shareholders
Prepare, execute and deliver share certificates (including all required legends), and update the corporation’s share ledger. Corporations are required to keep track of how many shares have been issued, how many are outstanding and how many each shareholder owns.
7. Obtain an Employer Identification Number
The Employer Identification Number (EIN) is the corporation’s Social Security number (Social Security numbers can only be issued to people, whereas EINs are issued 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.
An EIN can be obtained through the IRS by preparing and submitting IRS Form SS-4.
8. Select a Tax Election
For federal income tax purposes, a corporation can elect to be taxed as an S corporation or C corporation. This decision has significant tax consequences, so before making such an election, it would be valuable to contact a tax professional. If you decide to be taxed as an S corporation, IRS Form 2553 should be prepared, executed and forwarded to the IRS.
9. Obtain Required Permits and Licenses
Your corporation should determine whether it needs any permits or licenses from regulatory authorities having jurisdiction over the corporation, and if so, you must apply for and obtain said permits and/or licenses. For a comprehensive overview on what licenses your business requires, and to expedite and facilitate the filing process, check out QuickBooks Licenses.
While the process of incorporation may be complicated and tedious, it is vital to execute corporate requirements in order maintain corporate personhood and liability protection. Failure to do so could leave your personal assets vulnerable to seizure.
If incorporation isn’t right for you, or you simply want to learn more, see our video series on selecting the best type of business for you.