6 Steps to Becoming a Corporation
Follow this six-step process to turn your business into a corporation.
- Legally, a corporation is seen as distinct from its stockholders (owners).
- Having restricted liability, access to money and company continuity are benefits of forming a corporation.
- You must submit articles of incorporation to your secretary of state to establish a company.
- For companies of any size who want to incorporate, read this article.
Selecting the proper legal structure is one of the first stages in creating a business. You have the option of conducting business as an individual, partnership, corporation, limited liability company (LLC), or cooperative.
The best choice is frequently to register as a company. If you’re thinking about giving your company this status, keep reading to find out how.
How to become a corporation
Slate Law Group’s founder and managing lawyer Kelly DuFord Williams detailed the six main procedures a small business must follow to incorporate. However, each state has its own set of rules, so your procedure could differ. Check the state-specific corporate laws for the area in which your company will operate.
Engage a transactional lawyer. An attorney can guide you through the procedure of forming a business. An experienced attorney will be crucial in managing the formation process and preventing issues because state-by-state variations in corporate formation and governance regulations mean that they are continually changing.
Make a registered agent appointment and submit the articles of incorporation. Any corporation that files its articles of incorporation in a state must also have a registered agent there. An individual or business (also known as a registered corporate agent) is a registered agent if they agree to accept the necessary notification, also known as the service of process, if your corporation is named as a party to a lawsuit. This agent has to live in the state where your filing was made.
Make the company bylaws, then elect the directors. The corporation’s internal rules and regulations are outlined in its bylaws (similar to an operating agreement for an LLC). Some states do not mandate bylaws for companies. Adopting corporate bylaws, however, is advisable since they outline the duties and rights of the shareholders, directors, and officials of your company, removing any ambiguity and upholding corporate formalities. Additionally, before extending credit or allowing your corporation to create a commercial bank account, banks and creditors could need to view your corporate bylaws to confirm the authenticity of the corporation.
Publish stock. Shareholders who have given the company money, goods, or services are entitled to stock (an ownership stake in the company) in proportion to their investment. Shares of stock are categorized as securities and are often subject to both state and federal securities regulations.
Any more paperwork must be submitted to your local secretary of state. Your state could demand additional papers. For instance, every corporation operating a company in California is required to submit a statement of information within 90 days of the corporation’s establishment and once a year during the filing period. This is referred to as the yearly report in certain states. States have different filing requirements; in some, a declaration or report must be submitted the following year.
Fill out any required IRS paperwork. A company’s employer identification number must be requested (EIN). You will use this number, which functions as the company’s equivalent of a Social Security number, to open bank accounts for your business and to file your corporate taxes. It typically takes 30 days to file by mail, however, you may apply for an EIN online and get a number nearly instantly.
You can still submit your applications and forms online or through third-party agents that provide direct services if you are unable to pay to retain an attorney. Wendy Barlin, CEO of About Profit and author of Never Budget Again, cautions company owners to utilize these services carefully since even something as easy as ticking the incorrect box can have costly repercussions.
What is a corporation?
A corporation is seen by the law as an entity that is different from its stockholders (i.e., owners). A company has its resources, obligations, and legal protections from personal accountability for its stockholders.
A company has legal rights to possess and sell property, bring legal actions, be sued, and sell stock-based ownership interests. Because cash and ownership are raised and handled through stocks, it is also simpler to transfer ownership and raise money as a company.
Your business must adhere to the legal procedures set forth by your state to be recognized as a corporation.
What are the types of corporations?
There are several forms of corporations, including closed corporations, nonprofit corporations, S corporations, C corporations, and B corporations. Each kind of organization has distinct advantages, drawbacks, and legal requirements. The two most prevalent types are C companies and S corporations.
The essential information regarding each of these corporate kinds is provided below.
1. C Corporation.
A C corporation is a firm whose profits are taxed independently from the business income of its stockholders. Limited liability protection is provided to your company if you incorporate it as a C corporation. This implies that your assets cannot be confiscated as part of a judgment if your company is sued or declares bankruptcy. Both of your co-owners cannot do this, because a C company is allowed to have an infinite number of owners, also known as shareholders.
A registered agent who will serve as the point of contact for any legal actions brought against your business is a requirement for your C corporation’s board of directors. Your board will supervise the strategic direction of your business, appoint managers and officers, and attend director and shareholder meetings. At least once a year, these meetings must be held, and you must always record the proceedings in minutes.
2. S Corporation.
A corporation that passes its earnings on to its shareholders as personal income is known as an S corporation. This protects both you and your co-owners from paying taxes twice (taxes on both your business and personal earnings). From your company’s profits, you and the other business owners must pay acceptable wages.
To be considered an S corporation, your organization must have no more than 100 stockholders. As an American business, you must also submit taxes.
The highest criteria of corporate social responsibility are met by your firm if you apply for and achieve B corporation accreditation. Performance in the social and environmental spheres, legal responsibility, and openness are all part of these requirements. This classification is managed by the charity B Lab to give consumers’ requests for sustainable and inclusive economies priority.
B companies are notable for not being IRS or state-level tax entities. Regarding your taxes, bylaws, meetings, or permitted number of shareholders, this classification has no effect. Despite using the word “corporation,” B corporation status is not a form of company organization but rather a recognition that is excellent for your reputation. An S corporation, C corporation, partnership, LLC, or sole proprietorship are all examples of B corporations.
4. Closed corporation
Since C companies are permitted to have an unlimited number of shareholders, many firms opt to form them to sell their shares. Your company would be a public corporation if it carried out this activity. Contrarily, closed corporations are private businesses that are corporations with a predetermined maximum number of stockholders, usually 35.
If you run a partnership and desire the liability protections of a corporation without having to significantly restructure your organization, you may organize your company as a closed corporation. A closed company is an additional option if you want to circumvent required shareholder meetings and reporting requirements.
5. Nonprofit corporation
A nonprofit classification is normally only given to organizations that help the public or promote a certain cause. Despite having a structure that is similar to that of C companies, nonprofit organizations must manage their revenues differently. If your business is a nonprofit, you must utilize your revenues to cover overhead costs, employee wages, or charitable purposes.
All companies technically categorized as nonprofits are exempt from paying taxes. 501(c)(3) organizations, usually referred to as public charities and foundations, are among the most well-known kinds of NGOs. You may give to this non-partisan charity by donating. You may also be familiar with 501(c)(4) groups, which are nonprofits with social or political objectives. There are several nonprofit trade and professional associations.
Corporations vs. LLCs vs. sole proprietorships vs. partnerships
You might wonder how corporations differ from LLCs, sole proprietorships, and partnerships as you explore incorporating your firm. Here are some commonly asked questions concerning these different company structure types and their respective responses.
What distinguishes corporations from sole proprietorships, partnerships, LLCs, and other business structures?
These structures differ from one another in a definite way.
single-person business. A sole proprietorship is a single-owner, non-corporation firm. If your firm is a sole proprietorship, the revenue generated by the operation is taxed as personal income. Additionally, you are responsible for any legal actions taken against your company.
Partnership. Although there are several owners, partnerships operate similarly to sole proprietorships. The tasks and obligations of each party are often described in a business partnership agreement.
LLCs. LLCs are state-level classifications that provide limited liability protection to sole proprietorships and partnerships. Thus, even if your company is sued, your assets will still be protected, but to a different amount depending on the state. Your company still qualifies as a sole proprietorship or partnership for tax reasons at the federal level.
Corporations. While modifying a company’s federal entity classification, corporations provide liability protections akin to those of LLCs. S companies continue the pass-through taxes of partnerships and sole proprietorships. Profits earned by C companies are taxed separately from personal income. The requirements for shareholders, boards of directors, corporate rules, and regular meetings are likewise introduced by both forms of corporations.
What type of corporate entity is the safest?
The safest sorts of company entities are frequently S companies, C corporations, and LLCs. If your company is sued, your assets will be safeguarded thanks to these classes.
Which corporation entity is most advantageous for tax purposes?
S corporations, partnerships, and sole proprietorships could be the greatest business entity form in terms of taxes. With these kinds of business formations, double taxes on C corporations is avoided. However, the personal federal income tax rate is 22% for single taxpayers making $41,775 or more. As a result, if you restrict your pay and invest the majority of your revenues back into your company, C corporation double taxation may cut your taxes.
Here are some typical inquiries concerning companies and their responses.
Who comprise a corporation’s members?
The individuals or entities that are the owners of a company are known as its shareholders, which are comparable to an LLC’s members. The majority of states just require one individual to start a company, while the maximum number of shareholders varies depending on the kind of business. For instance, S corporations are restricted to 100 shareholders who must all be citizens of the United States, but C corporations have no ownership limitations.
A corporation safeguards the private assets of each owner, in contrast to other corporate entity kinds. When a shareholder contributes money to the business, they generally receive shares equal to a percentage of their capital commitment.
Williams stated that if the business is successful and profitable, the shareholders will be entitled to a pro-rata portion of the earnings. “If the corporation experiences financial difficulties and is forced to liquidate, the shareholders are solely accountable for the amount of their investment, meaning they won’t receive their money back but creditors cannot pursue the shareholders’ other assets.”
What benefits come with creating a corporation?
Both benefits and drawbacks of incorporation exist. On the plus side, restricted liability, business continuity, and finance are the three main benefits of forming a corporation.
limited responsibility Because a corporation is a separate legal entity from its owners, shareholders are exempt from personal liability for corporate misdeeds (unless in cases of carelessness) and their private assets are shielded from lawsuits and debt collection. Although liability protection generally applies, stockholders are nevertheless subject to the laws of their respective states.
company continuity No matter who the owners are, a company can continue to conduct business. This is another significant benefit. It is simpler to transfer ownership because a company is its entity and shares are used to do so (and percentage of ownership). This is especially helpful if a shareholder passes away or wishes to quit the business.
getting financing. Although maintaining a corporation is sometimes more expensive than maintaining other business organizations kinds, incorporating usually makes it simpler to obtain significant sums of money from several investors.
What drawbacks come with being a corporation?
On the negative side, businesses must deal with a drawn-out procedure, strict standards, and double taxes.
long procedure. It might take a while to apply to create a corporation. Additionally, the paperwork may be rather lengthy. You might not be prepared to include it if your time is tight and you’re seeking to reduce boring effort.
rigid standards. Corporations must also adhere to certain reporting, meeting, and structure criteria. Bylaws must be written and updated often. A board of directors must be chosen, and they must hold at least one annual meeting. You must also keep minutes at each meeting, which can be time-consuming.
taxation twice. You will pay two taxes if you incorporate as a C corporation. As a result, you will have to pay taxes on both your business income and the portion of the earnings that go to your shareholders. Your expenses won’t stop there; starting and running a business is considered to be pricey.
What is the time frame for incorporation?
As soon as you submit your articles of incorporation to the secretary of state, your business becomes incorporated. Although completing the form might just take a few minutes, getting all the paperwork ready to file the articles of incorporation could take weeks or even months.
What is the price to form a corporation?
Depending on your state, the cost to file articles of incorporation might range from nothing to hundreds of dollars. The total cost of setting up a business also depends on your state and the kind of organization you want. You can also be required to pay a registered agent charge.
Williams stated that every corporation has to have a registered agent to receive legal process. The yearly costs will vary based on the firm, however, there are qualified registered agent companies that will carry out registered agent obligations for the corporation.
Does every company have to be incorporated?
Simply put, no. Not every firm will gain from incorporating; some businesses that do so end up in worse financial shape than they did before. It takes effort and money to start a corporation (and then keep it that way). Before you take any action to incorporate, you must speak with a lawyer and a tax expert.
For some business owners, maintaining the legal and income tax obligations of a corporation can be onerous and expensive, according to Berlin. “Despite the possibility of financial savings, several of my multimillion-dollar business customers have decided against incorporating due to the associated personnel expenses. For some business owners, the duties and obligations may not justify the tax breaks and legal advantages.
You must understand the objectives and potential of your business to decide whether incorporation is in your best interests. For instance, you might want to reconsider incorporating if you solely wish to do so for tax reasons. According to Berlin, unincorporated enterprises are eligible for the same income tax deductions. Regardless of the corporate form, you can write off any business cost that is deemed “ordinary and essential” for your company, with a few restrictions.
turning into a corporation Incorporating your firm might take a while, and keeping your corporate status can be difficult. But numerous other companies have succeeded in doing it time and time again, and yours can too. Additionally, the legal advantages and funding opportunities that company status affords can make the endeavor worthwhile. You may manage the procedure and choose whether or not to accept the risk with the assistance of knowledgeable legal counsel and business advisers.