A corporation is a legal business structure or entity that has separate owners and shareholders. If you are just starting a business, then you should know the corporation is not the only legal structure that you can form. There are different types, but the corporation is vast which enjoys many rights and benefits. It can enter into contracts, own assets, loan money and hire people without the risk of being personally liable for business debts and legal obligations.
If you are new, you may not know the ins and outs of starting a corporation. However, there isa number of important steps you need to follow in order to form and run a corporation properly. This article will throw light on the steps involved to start a corporation, and its advantages and disadvantages.
Steps to Form a Corporation
Corporations are the most difficult and expensive business structures to form. If you are starting a home-based business or a very small-scale business, the corporation should not be your ideal business structure to incorporate. You must hire a lawyer or use a legal service providing firm to help you complete the process, including customizing the documents, filing the articles of incorporation, creating resolutions, and walking you through the norms.
The state you live in will have a huge impact on the requirements to be fulfilled to start a corp. to obtain specific information, please visit your state’s business administration website or walk into a local authority office and talk to someone informative.
Step 1: Choose Your Corporation Name
The first step should be choosing the name of your business. Remember, a corporation is a sophisticated form of a business venture and therefore, you should not probably think of keeping a sassy and cheesy name. The name should identify your business services. Plus, you need to include a corporation designation. Examples include Careerlancer Inc. or CareerlancerPvt.Ltd. Company or Careerlancer Corp. These are abbreviations of Incorporated, Limited and Corporation.
Every state has a list of restricted words that no business is allowed to use in their corporation name. Bank and Insurance are common words that are restricted in most states. Before you choose your business name, visit a business trademark search website and find out whether your chosen name does not infringe on any trademarks. You will be able to view all the active registered federal trademarks and other pending applications. This will help you determine the best name for your corp without goofing up.
Trademark is not the only aspect you need to take care of. In fact, you should also find the legal availability of the name. Choose a marketable name for your corporation. At the same time, see that your chosen name is not already being used by another corporation in your state.
You can check if a corporate name is available for use by logging in to state’s business and corporation website or walk into the office directly.
If your name is available, ask the state’s corporation officials whether they can hold the name for you until you have filed the articles of incorporation. You can register your business name only after you file your articles of incorporation. This is the case in most states.
Step 2: Appoint Directors
You can appoint yourself as the director of the corporation or appoint a separate board of directors who will take part in decision-making and strategizing plans. The roles of the directors include authorizing the issuance of stock, appointing corporate officers, approving loans, and setting officers’ salaries.
Directors are usually appointed by the owners or shareholders of the corporation and this should be done before the business starts to operate. An owner can be a director, but it is not necessary that the director has to be the owner. Basically, the board of directors should be smart and capable to handle the business and must definitely be visionaries.
Depending upon your state’s regulation, you will appoint the directors. For instance, in some states’ regulation, the number of directors to be appointed depends upon the number of owners of the corporation, such as two directors for a corporation with two owners, three for three owners and so on. On the other hand, most states permit a corporation to appoint just one director, regardless of the number of owners.
Step 3: File Articles of Incorporation
You have to prepare yourself for filing the articles of incorporation in your state’s corporate filing office after the directors are appointed. While most states use the term articles of incorporation to refer to the documents required to create the corporation, other states may refer the documents as charter or certificate of incorporation.
The minimum number of owners states require a corporation to have is one. If you are going to be the sole owner of the corporation, you will have to prepare the papers, sign, and file the article of incorporation yourself. The process of sole owners is relatively easy.
If your corporation has more than one owner, either all of the co-owners can sign the articles of incorporation or nominate a person who will represent the owners and sign the articles. The individual representing the owners of the corporation will be referred to as ‘incorporator’ or ‘promoter’.
One can simply prepare the articles of incorporation within an hour, as they generallydo not tend to be lengthy and complex. The state corporation office will provide you with a form. In the form, you have to fill in a few basic details about your corporation, such as business name, main office address, and the name of the directors.
You will also have to mention the name and address of the corporation’s ‘registered agent’ on the form. A registered agent or agent for service of process is usually one of the directors of the company.
This is a mandatory format for just in case members of the public want to know how to contact the corporation, then they would use the person’s name on the article of incorporation file. The registered agent’s name would be used if members involve the corporation in a lawsuit. The registered agent will also receive all the documents relating to the business to his mail address, such as process notices, compliance documents, government bonds or correspondence etc.
Step 4: Write Down the Bylaws of Your Corporation
By-laws are important rules that hello govern the corporation ethically. The internal rules that regulate the everyday operations, such as where and when the shareholders’ meeting will be held, how the directors will be voted, what the shareholders’ voting requirement be etc. Bylaws are very important to ensure the corporation works towards the growth by staying inside a system. The Bylaws are spelled out to the board directors at the corporation’s first board meeting. If you have no idea how to form the by-laws, ask your lawyer to draft them for you. You can also look up the internet for reference. You will find several self-help resources on the net on developing corporation bylaws.
Step 5: Prepare the Shareholder’s Agreement
Shareholder’s agreement though optional definitely a positive add-on to the list of documents needed to be created for incorporating a corporation. It states the mandatory steps or course of action to be followed in the event of the retirement, death, or disability of an owner. A shareholders’ agreement will also help the corporation plan if the owner decides to transfer the ownership of his shares in the corporation. The shareholder’s agreement will indefinitely protect the interest of the remaining shareholders if the owner wishes to leave the corporation or dies. Since you may not have the required expertise to draft a shareholder’s agreement, you will again have to seek the help of a business attorney. You can ask the same attorney to help you write down the bylaws as well as the shareholder’s agreement.
Step 6: Hold the First Board Members’ Meeting
After everything is accomplished – the articles of incorporation filed, the bylaws created, the shareholders’ agreement drafted and the directors appointed – hold the first meeting of the corporation. The board meeting will address the corporate formalities and make some important decisions. Some of the points to be discussed and decisions to be made on the first board meeting include:
- Determining the corporate fiscal year
- Spelling out the bylaws and adopting it
- Appointing the corporate officers
- Determining the official stock certificate form and corporate seal and
- Authorizing the issuance of shares of stock
A corporation can also be an S corporation. An S corporation isalso a regular C corporation, which allows the owners to enjoy limited liability of a corporate shareholder but pay income taxes like how a sole proprietor or a partner in a partnership firm would pay. In regular C Corporation, the company as a whole is taxed on business profits, meaning the owners pay individual tax on the money they receive from the company as salary, dividends or bonus.
If your corporation will be an S corporation, the directors should approve the election of the S corporation status.
Step 7: Issuing Stock
One of the standard requirements for running a corporation includes that the owner cannot do business until he has issued shares of stock. And also, the corporation should always act like a corporation to qualify for the legal protections offered to corporate status companies. Shares issuance formally divides the ownership of interests in the business among all shareholders.
Registration of Stock with SEC
Since the issuance of stock must be accomplished by adhering to the security laws of your country, corporation must register their stock offerings with the federal Securities and Exchange Commission (SEC) of the respected country and the state security agency. The entire registration process is legally regulated, and therefore, it may take time and incur additional litigation and accounting fee.
However, there are exemptions that small corporations can qualify for.
For instance, SEC rules do not levy on corporations to register as private ltd. or private offering. A private offering is a non-advertised sale to a limited number of people or it is issued to a company whose shareholders can take care of themselves because of their income earning capacity or net worth. In clear words, if your corporation plans to issue shares to 10 or lesser shareholders who will also be active participants in running the business, then you shall definitely qualify for exemptions of securities registration.
On the other hand, if you are going to sell shares to passive investors or shareholders who will not be actively involved in running the company, following the laws of state and federal security becomes an important obligation. You will be able to find your state’s exemption rules on your secretary state’s website.
You have to record the following information while issuing shares to shareholders:
- Names and contact details of shareholders
- Number of stocks each shareholder will buy
- How payment for each share will be made by the shareholder
When this is documented, you shall be able to issue the stock certificates to the shareholders. Check with your state corporation office if you have to file any other form to complete the transaction, such as “notice of stock transaction”.
Step 8: Obtain Licences and Permits, and Complete other Formalities
You will need to open certain business licenses and permits before you start commencing business. The licenses and permits requirements will vary with each state and local government. Your operating industry will also determine the kind of permits and licenses you will require. Thereafter, you will also need to obtain a tax ID number from your IRS for paying business taxes. Do not forget to open a corporate bank account for carrying out business related financial transactions. In order to open a corporate bank account, you may be required to provide an EIN number or a corporate resolution to the bank. Check with your respective bank for more details.
These were the essential 8 steps that will help you get started in forming a corporation. The list may vary depending upon the industry, and your state and local laws. In case you have doubts, comment your questions below and we shall help you out.