To Create a Corporation: Everything You Need to Know
To create a corporation, you'll need to go through a number of important steps and it's recommended to hire a lawyer to assist you in the process.3 min read
2. Steps to Forming a Corporation
To create a corporation, you'll need to go through a number of important steps. It's recommended to hire a lawyer to assist you in the process, as it can be rather difficult to do on your own.
What Is a Corporation?
A corporation is a specific kind of business structure that is a legally distinct entity separate from the finances of its shareholders and owners. Just like an individual sole proprietor, corporations can own assets, enter into a contract, loan money to other parties, and hire employees. Unlike an individual sole proprietor, no single person will be held liable for any of the corporation's legal obligations or debts.
However, that benefit does not come without a price. Corporations have extremely complicated administrative and legal requirements, meaning the corporation designation is typically only used by bigger companies, such as Microsoft or Coca-Cola.
Because each state sets their own rules regarding corporations, this also makes it tricky to operate as one. Most states do require corporations to file an articles of incorporation, which defines the company's policies and guidelines and acts as a document of creation for the corporation. After filing this document and paying a fee, the corporation can then receive an official certificate of incorporation from the state.
Steps to Forming a Corporation
There are several steps to take when you decide to form a corporation:
- Choose your name. This will help define your company and set it apart from other businesses. Depending on your state, you may need to include the word "limited," "incorporated," or "corporation" in your name.
- Check to make sure your name is available. If another company is using an exact or similar name, you may not be allowed to register it with your state.
- Register the name of your corporation. Follow your state's policies for name registration. In addition, consider registering any fictitious business names you might use during the course of business.
- Choose where to incorporate. Deciding on which state to incorporate in can be tricky. Sometimes, incorporating in a state where you don't conduct business can be advantageous. For example, many companies incorporate in Delaware because the state has favorable laws for corporations.
- Pick the board of directors. When choosing your board of directors, you want to select capable leaders, as they'll be in charge of protecting the interests of the shareholders and managing the operation of the company. In many cases, directors can be investors, officers, or someone with no relation to the company whatsoever.
- Start working on the articles of incorporation. It will act as the official charter for your new company. You'll also need to get signatures from the directors of the company.
- Compose bylaws. Bylaws can help define the responsibilities for each shareholder, director, and officer involved with the company. They also state who will manage certain aspects of the business and the overall purpose of the company.
- Write a shareholder agreement. To give your shareholders a better idea of their responsibilities and rights, create a shareholder agreement. It should cover share valuation as well as ownership terms.
- File and pay the fee for the articles of incorporation. After putting the finishing touches on your articles of incorporation, send it to your local Secretary of State office along with the specified fee.
- Choose S corporation status. While this is an optional step, it could be a good way to avoid double taxation without giving up the liability protections of a corporation. If you don't take any action, you'll automatically be classified as a standard C corporation.
- Create a new business bank account. Because you don't want to mingle your personal funds with your company's funds, you'll need to open a different bank account that's just for business.
- Record all meeting minutes in a notebook. Your minute book is the place to write down everything that happens during a board meeting. It helps you keep people accountable and is an accurate record of every action and discussion.
- Hold a board meeting. Once you've obtained a minute book, put it to good use by holding your very first board meeting. At this meeting, you'll discuss the goals, vision, and structure you have in mind for the corporation.
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