How to Form a Corporation

Learning how to form a corporation begins with understanding the ins and outs of the business entity. There is quite a bit to know about how to form a corporation. There are significant advantages of incorporating and a lot to understand about the process.

Advantages of Incorporating

A corporation is liable for all debt or legal responsibilities rather than the owner. Partnerships and sole proprietorships will require that the owner is personally responsible for all debts and liabilities of the business. In most cases, the creditors will go after the owner’s personal assets in order to collect all outstanding business debts.

In the event a corporate officer or shareholder does something negligent, guarantees a corporate debt, or personally signs a debt, the corporation will not protect that person from the consequences.

Corporations can have a perpetual existence. If a sole proprietor dies, assets can go to the heirs, but the business will dissolve. They can continue the business in their own names, but it will be a new business no matter if they are utilizing the assets of the prior one.

In a partnership, the death of one partner can result in the dissolution of the business. Assigning a stock certificate can transfer a corporation and its assets. Sole proprietorships and partnerships require all of the assets and licenses to be transferred individually.

Shares of the company can be more easily distributed in a corporation by distributing stock.

A corporation can raise money by selling stock or borrowing money. It will not pay taxes on money raised by the sale of stock.

There are some tax advantages, including the following:

  • Medical insurance for families that are deductible
  • Tax deferred trusts set up for retirement
  • Fully deductible losses
  • Must prove that there is a profit motive before deducting losses

The name of a corporation will sound more prestigious than a sole proprietorship. Corporations also have their own credit ratings that can be better or worse than personal credit ratings of the shareholders.

Choosing a Corporate Name

Picking a name for the business should adhere to all state corporation rules. Names should be unique and not be on file with another business on file at the corporation’s office.

Company names will need to be appended with a corporate designator. This includes "Corporation," "Incorporated," "Limited.” The name should not include words that suggest the business is related to a federal entity.

State corporation’s offices can tell you if the name of your corporation is available. You may reserve your proposed corporate name in some states for a fee. The timeframe ad fee on holding your reservation will vary in different states.

You need to consider that the corporate name should not violate any other trademark. Different names are used to sell the corporation’s product or services and should be labeled as fictitious or assumed with the state.

The incorporation can be filed in other states from the headquarters if it is beneficial to the company. You should also check the availability of the web domain for your chosen name if you intend to build a website for the business.

Appointing Directors

The director will make all major policy and financial decisions for a corporation. This includes the authorization of stock and appointing corporate officers. The owners or shareholders of the corporation prior to the opening appoint directors. Many owners opt to name themselves directors.

The amount of directors required to be on the board will be different in varying states. You may only need one in some states, but multipledirectors in others.

Filing Articles of Incorporation

The articles of incorporation will need to be prepared and filed in the corporate filing office. These are the documents creating the corporation. It is also referred to as a certificate of incorporation or a charter.

A corporation can have one or more owners. A sole owner will be the person who signs and files the articles of incorporation. Multiple owners can designate one person an incorporator to sign the articles of incorporation.

You can find a pre-printed Articles of Incorporation form on the internet or at each Secretary of States office.

In general, articles of incorporation will need to specify some details about the business. This will include the corporate name, the office address, and the names of the directors.

You will also need to name one person’s name and address that will be named the registered agent. This is the contact person for the public should anyone need to contact the corporation.

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