You’ve decided to start your own business and are ready for the next step: forming a corporation.
You might be wondering what it takes, but thankfully we have this guide that will walk you through all of those necessary steps to learn how to start a corporation yourself!
What is a corporation?
A corporation is a company that is formed by a group of people who, as shareholders, have invested in the company.
Unlike a sole proprietorship or a partnership, a corporation, which the law considers a separate entity from its owners, each owner’s personal assets and liabilities are separate from those of the corporation they have established.
And regardless of who owns the corporation, even if it is a nonprofit corp, such an entity can last for as long as it can, because the shares of the company are passed on to the new owner, such as an outside investor, for example.
You can get more details on a subject from our free comprehansive guide namely; what is a corporation.
How is it different from an LLC?
Among other things, ownership structure, management, and taxation are some important factors that separate a corporation from an LLC.
A corporation’s owners are called “shareholders”, while an LLC’s owners are referred to as members. The LLC’s members can either manage the business, or hire managers to do the overseeing.
Corporations, though, have a board of directors that are responsible for the business, though shareholders can elect to remove or appoint a director.
Ownership of a corporation is through holding a “share” of the corporation. A corporation’s shares of stock can be sold or transferred between different people.
LLCs do not have shares of stock, but members can have a stake in an LLC through membership interests or units, which is how much a member owns the company (similar to a corporation’s stocks).
The way taxes, profits, and losses are handled also differ, However, this case, not all corporations are the same.
There are two types of corporation
- S corporation
- C corporation
In an LLC, taxes go directly to the members, each of whom pays a share. An S corporation is taxed similarly.
Also see our comprehansive guideline on: How LLCs are Taxed?
The C corporation, on the other hand, pays taxes as one legal entity, instead of its shareholders; however, they can be subject to double taxations if they distribute their profits to shareholders as dividends.
Why and When You Need a Corporation?
There are reasons why and when a business would want to incorporate, and they are beneficial to not only the business, but also its shareholders.
Why Incorporate?
To start, there is the limited liability aspect of a corporation. Generally, a corporation has its own assets and liabilities. And as corporations are treated as separate legal entities, this attribute protects their shareholders from liabilities incurred on their personal assets.
Ownership of a corporation is technically unlimited, because shares of stock can be transferred between people. This means that whether an owner dies, chooses to sell their stock, or retires, the company can still remain in business.
Incorporating also allows businesses to attract investors, who in turn will buy shares of the company, as over time, their investments will pay dividends thanks to higher earnings per share, which partially comes from profits made by the company by the end of a financial period. Money made from stocks can also help in raising capital.
Another reason why a business would incorporate is better access to capital. Businesses need capital to be able to fund its operations, and grow over time, and getting easier access to capital allows the business to invest not only in its own existing activities, through improvements in equipment and facilities, for example, but also in its future goals, such as product innovation, and marketing campaigns, just to name a few. Aside from stocks, banks are more likely to offer business loans to corporations.
Corporations tend to be viewed as more credible by the general public, and commercial contracts are more likely to be offered to corporations, as they tend to have plenty of assets that allow such companies to respond to customers’ needs more quickly. Corporations are also more likely to attract more prospective employees.
And finally, any intellectual property (IP) of a corporation is an asset that is legally protected from use outside the company, unless consent is provided by the company itself. Different types of IP include, for example, intangible assets such as trademarks, copyright-protected properties (e.g. a company-made product), patents, and trade secrets.
When to Incorporate?
You will want to incorporate as soon as possible, if you want to reap the benefits of a corporation. The sooner you do so, the sooner you will attract investors and other businesses who may express interest in the incorporated business. Especially as you may incur fewer personal liabilities until incorporation.
Bear in mind that the incorporation process takes time, and requires documents to be prepared, as well as patience; it could take from one to several months before your company becomes officially incorporated.
How to Start a Corporation DIY | Step by Step
Whether you are starting a new company or wanting to expand your current one, starting a corporation is one of the recommended ways like an LLC formation. In this article we’ll go over how it works and what steps must be taken in order for you incorporate yourself successfully!
- Name your Corporation
- Appoint a Registered Agent
- File an Articles of Incorporation
- Hold a Board Meeting
- List A High Number of Authorized Shares
- Get an EIN
1. Naming your corporation
Corporations are typically identified with “Inc.” “Corp.” etc, in their names, such as Apple Inc., and Alphabet Inc. (Alphabet is the owner of Google).
But in full, they consist of three parts:
- A distinctive element, such as a brand name,
- A descriptive element, i.e. what the company provides,
- A legal ending (Co., Inc. etc.)
For example: “Apple Computer Co.”, where “Apple” is the distinctive element, “Computer” is descriptive, and “Co.” is the legal ending for the corporation.
When naming your corporation, make sure that it is not taken by any existing business, and also ensure that it does not violate any existing trademarks. Make sure to follow regulations regarding corporations in the area you intend to establish a corporation.
2. Appointing a Registered Agent
Businesses, such as corporations, have been required to appoint registered agents. This is because there must be a way for such businesses to be reached. The registered agent is a way for such communications to be facilitated. Also, during incorporation, you will be required to name a registered agent while filing an article of incorporation.
Whether it is a legal complaint, tax document, or official mail, a registered agent will receive such a document, and forward it to the appropriate concerned party, along with potential actions to take.
To put it simply, a registered agent is someone who accepts services and mail on behalf of the company. Attorneys, for example, can make great registered agents, especially in legal affairs.
3. Filing Articles of Incorporation
For a corporation to legally exist as such, articles of corporation must be filed by the business that wants to incorporate, and be approved by the government. The article is essentially an official certificate designating the company to be legally a corporation.
When filing an article of incorporation, you will be asked to provide the following:
- The corporation’s legal name and address
- Business purpose (the company’s main activities)
- Registered agent
- Number and type of shares
- Incorporator
While requirements vary from location to location, most general requirements are the same.
Incorporation services can help you through the process, as they are more familiar with the relevant laws regarding incorporation, and can help your company in future business decisions.
4. Holding a Board Meeting
The required frequency of board meetings may vary by country, or state, but such meetings are required to be held at least once per quarter, year, or month. A board meeting will allow directors to help with a business plan, solve problems, or discuss the status of the company.
Prior to a board meeting, you must prepare an agenda and send it to the board members so that they have a chance to prepare in advance. The details of the agenda are up to you.
A board chair must be present to ensure that discussion is held efficiently, and that meeting rules are followed and adhered to by every member present. He or she can also help add to the ongoing discussions, as well as keep track of time. Once the main discussion has been concluded, the chair will start a poll in which members must vote before a resolution is set forth.
Finally, minutes must be prepared and reviewed. A minute is a corporate record that contains details of the meeting, such as who attended, what the meeting is about, where the meeting took place, and any actions taken.
5. List A High Number of Authorized Shares
The maximum legal amount of shares that a company can offer to investors is the number of authorized shares. This is also listed in the articles of incorporation.
Issued shares can help raise a company’s funds, while other preserved shares are kept until an IPO (initial public offering), or as stock option, all under the company’s discretion. But a company might not want to offer all of its shares, so that it can prevent someone else from taking over the company as a whole (hostile takeover).
Investors will want to know how many authorized shares are present so they can prepare for a potential stock dilution, which results in reduced ownership (or stake) in the company as well as voting power, and even lower earnings per share.
6. Get Employer ID Number
What is an EIN? You may have heard of the term “Employer Identity Number” before, but what do you really know about it.
Do you know why you need an EIN to incorporate? You need an EIN number due to the following reasons:
- To open a bank account
- To deal taxes
- For hiring in your company
If you want to get an EIN for free, you can:
- Obtain it from IRS official: Online or through mail
- Hire an affordable formation service like BetterLegal
