Key Takeaways

  • The formation of a corporation involves multiple legal steps, including naming, filing Articles of Incorporation, appointing a registered agent, and establishing bylaws.
  • Corporations are separate legal entities that provide limited liability protection and can exist indefinitely beyond their founders.
  • Choosing the right type of corporation (C-corp, S-corp, nonprofit, etc.) impacts taxation, governance, and investor appeal.
  • Corporate bylaws, initial shareholder meetings, and issuance of stock are critical compliance steps often overlooked by new business owners.
  • Most states require corporations to maintain annual reports, keep proper records, and follow corporate formalities to preserve liability protections.

How is corporation formed? That is a question asked by many hopeful potential business owners. There are a variety of different corporations that are available, depending on the form of organization you wish to start.

What Is a Corporation?

A corporation is a type of business that can be formed by a group of individuals. Different groups of people and organizations can form a corporation. A nonprofit organization, a municipal organization, or a private party can all form corporations to serve as an umbrella over the organizations. Private corporations, unlike the other examples, are meant to make a profit.

The corporation has its own rights and liabilities that are not connected to the group of people who started the business. On the same token, a corporation has mostly the same rights as people in the eyes of the law. They can:

·      Purchase, sell and own property through the use of leases and contracts

·      Bring lawsuits

·      Subject to taxation

·      Be prosecuted in court and punished through fines if found in violation of the law

There are some primary advantages of forming a corporation. A corporation has an indefinite life. That means it will outlive all the founding members and can last for generations. A corporation also protects the founders and members from being held personally liable for any financial impact that occurs within the corporation.

Among all of the different types of businesses you can form, a corporation takes the most time and effort to create and maintain. However, they also provide the best form of protection to you as a founding member, a greater ability to raise capital, along with other useful advantages.

Before you jump into forming a corporation, you should fully understand the process and follow the process carefully to ensure you set up the most useful type of legal structure for your business.

Types of Corporations and Their Purposes

Before beginning the formation of a corporation, it’s important to understand the different types available, as each serves distinct purposes and comes with unique tax and governance implications:

  • C Corporation: The most common type, offering unlimited growth potential through stock issuance. It is subject to corporate income tax and can attract venture capital.
  • S Corporation: Similar to a C-corp but allows profits and losses to pass through to shareholders’ personal tax returns. Limited to 100 shareholders and certain ownership restrictions apply.
  • Nonprofit Corporation: Formed for charitable, educational, religious, or public purposes. Profits cannot be distributed to members or directors.
  • Professional Corporation (PC): Designed for licensed professionals (e.g., doctors, attorneys) and offers liability protection while complying with industry regulations.
  • Benefit Corporation (B-Corp): A for-profit corporation that includes a social or environmental mission in its governing documents.

Choosing the right structure early in the incorporation process ensures the corporation’s legal and tax treatment aligns with its long-term goals.

Limited Liability

With a corporation, there is going to be limited liability. If you are the owner in shares of a corporation and it is unable to pay its debts or is sued, assets within the corporation can be seized to repay those debts. But thanks to the corporate umbrella, creditors may not take any of your personal assets to repay those debts. This includes your cars, property, or money in any bank account.

However, you must be careful to keep your personal affairs and your business affairs completely separate. If they become overly entangled, the creditor or any entity that is suing the corporation can opt to ask the court to pierce the corporate veil. This will allow the shareholders to be held personally liable, meaning your personal assets could be at stake.

You could also be held personally liable if your corporation is not compliant with all the legal formalities or if records are not carefully maintained.

Step-by-Step Process for the Formation of a Corporation

Forming a corporation involves several legal and procedural steps, which may vary slightly by state but generally follow this sequence:

  1. Select a Business Name: Confirm that the name is unique, includes a corporate designator (e.g., “Inc.,” “Corp.,” “Ltd.”), and complies with state naming rules.
  2. Appoint a Registered Agent: Designate a person or service authorized to receive legal documents on behalf of the corporation in the state of formation.
  3. File Articles of Incorporation: Submit this foundational document to the Secretary of State. It typically includes the corporation’s name, purpose, principal address, stock structure, and registered agent information.
  4. Draft and Adopt Corporate Bylaws: Bylaws govern the internal operations of the corporation, including voting procedures, board responsibilities, and meeting requirements.
  5. Hold an Organizational Meeting: During this meeting, initial directors adopt the bylaws, issue stock, and appoint corporate officers.
  6. Issue Stock Certificates: Distribute shares to initial shareholders in accordance with the corporation’s authorized share structure.
  7. Obtain an Employer Identification Number (EIN): Required for tax filings, opening bank accounts, and hiring employees.
  8. Register for State and Local Taxes: Some jurisdictions require additional business licenses or permits depending on the industry.
  9. Comply with Ongoing Requirements: File annual reports, maintain meeting minutes, and keep corporate records updated to retain good standing.

Following these steps carefully helps ensure that the corporation is properly structured and recognized as a distinct legal entity.

Form a Corporation: Choosing a Corporate Name

When you name your corporation, the name has to comply with your state laws. To get the rules, you need to contact an attorney or the governing body over incorporation in your state. However, there are some general guidelines that you need to follow in all states:

·      The name of the corporation may not be the same as other corporations already on file

·      The name must end with the corporate designator, such as corp., inc., or ltd.

·      The name may not include specific wording as prohibited by law including cooperative, bank, or federal

If you are unsure whether your corporation name is already in use, contact your state’s corporation office and have them check. If you know that you want to form a corporation in the future but are not ready to do so immediately, you may pay a small fee to reserve your name temporarily while you are filing your articles of incorporation.

In addition to following the corporation naming rules in your state, you have to also ensure that you are following the rules regarding trademarks, as you should not be in violation of another company that already uses it.

After you have determined your corporation name is legal, you do not typically need to file the name with your state. Once you file articles of incorporation, your business name is automatically registered.

One thing to keep in mind, however, is if you choose to sell your services or products using a different name, it will be necessary to file a name statement in your state or county that says you will be using an “assumed” name.

Initial Meetings, Stock Issuance, and Recordkeeping

After filing the Articles of Incorporation, the initial board of directors must hold an organizational meeting. During this meeting, they:

  • Adopt the corporate bylaws
  • Elect or confirm corporate officers (e.g., CEO, CFO, secretary)
  • Approve the issuance of initial shares to shareholders
  • Authorize the opening of corporate bank accounts
  • Approve key contracts or leases

Accurate recordkeeping is essential. Meeting minutes, shareholder agreements, and stock issuance records should be maintained meticulously. Failure to do so may jeopardize the corporation’s limited liability protections and make it vulnerable to “piercing the corporate veil” in legal disputes.

Corporate Bylaws and Governance Requirements

Bylaws are one of the most important yet often overlooked aspects of forming a corporation. They serve as the corporation’s internal rulebook and should cover:

  • The structure and powers of the board of directors
  • Procedures for holding shareholder and board meetings
  • Voting rights and quorum requirements
  • Officer roles and appointment procedures
  • Guidelines for issuing additional shares and handling conflicts of interest

Although bylaws are not filed with the state, they are legally binding and must be kept with corporate records. Properly drafted bylaws can help prevent internal disputes and demonstrate to courts that the corporation is operating as a legitimate, separate legal entity.

Frequently Asked Questions

  1. How long does the formation of a corporation take?
    Typically, it takes a few days to several weeks, depending on the state’s processing times and whether expedited filing is chosen.
  2. Do I need a lawyer to form a corporation?
    While not legally required, consulting a business attorney can help ensure compliance with state laws, proper drafting of bylaws, and protection of shareholder interests.
  3. What are Articles of Incorporation?
    These are the official documents filed with the state to legally create a corporation. They outline essential details like the corporate name, purpose, and stock structure.
  4. Can I form a corporation in a different state?
    Yes. Many businesses choose to incorporate in states like Delaware or Nevada due to favorable corporate laws, but you must register as a “foreign corporation” in other states where you operate.
  5. What happens if a corporation fails to follow corporate formalities?
    Failure to maintain records, hold meetings, or separate personal and business finances can result in loss of limited liability protection, exposing shareholders to personal liability.

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