What are the Steps Required to Become a Corporation?
One of the most important first steps is to choose a name for your corporation that is not being used by anyone else in the state.4 min read
People commonly ask what are the steps required to become a corporation? One of the most important first steps is to choose a name for your corporation that is not being used by anyone else in the state. Each state has its own procedures for approving corporation names, but typically you have to provide up to three names in order of preference, and the state will tell you which one(s) are approved.
Steps to Filing Your Corporation
There are some basic steps you need to take in order to set up a corporation.
- Appoint a director, or a group of directors
- File articles of incorporation with your local Secretary of State
- Write corporate bylaws
- Issue stock shares; which will represent ownership percentages for each person
- Set a directors' meeting to vote on approving the bylaws and take minutes
- Apply for a Federal Employer Identification Number (EIN)
- Decide on your tax election
- Set up bank accounts, which can't be done until articles of incorporation are filed
You also need to research whether there are additional licenses or permits required from local or state agencies who have jurisdiction over the corporation.
Tips for Choosing a Name and Eligible Directors
The name you choose needs to end in some type of reference to being incorporated. Options include “Corporation,” “Incorporated,” or “Limited.” You can also opt for an abbreviation like “Inc.,” “Corp.,” and “Ltd.” Verify that no one else has trademarked the name you want in a different state. Use the U.S. Patent and Trademark search tool to research this information. Your name can't be similar to that of an existing business.
It's wise to see if a website domain name is available as well. Do a local business search to see if other companies in the area are operating with a similar or exact matching name.
If you are a small business owner, you can be the director, but if you want to appoint anyone else, you should do it prior to filing paperwork. If you are the sole director, you can also be the sole officer.
Articles of Incorporation
Articles of incorporation are also called a charter or certificate of incorporation. These forms are available at your local Secretary of State. You are not obligated to form your corporation in the state where you reside. Other states may offer better tax benefits and lower filing fees.
Do You Need Bylaws?
The simple answer is yes. All corporations must have bylaws, as these are the guidelines and rules for operating your business. Your bylaws should spell out when directors' meetings will be held and who is eligible to vote.
Don't be tempted to skip this step if you are a small business owner and the one serving as the director and only officer. Failure to comply with corporation rules can result in losing your status as a corporation. Not every state requires a corporation by draft bylaws, but they are an essential document that outlines your corporation's operations, purposes, and owner duties.
Stock Issuing Guidelines
Per the Securities and Exchange Commission (SEC), you are not required to register shares if you make a private offering and there are less than 35 shareholders in total. You can purchase blank share certificate at a number of retailers, including some office supply stores. Don't attempt to run your business without issuing these shares because it puts you at risk for losing your corporate status, even if you are the only shareholder.
Advantages of Starting a Corporation
There are a number of advantages to starting a corporation:
- Personal liability protection: A corporation is a separate legal entity. This means debts and lawsuits are incurred by the company rather than the owner. While incorporating offers an added protection layer, but it's recommended to purchase liability insurance and consult with a lawyer.
- Taxation: There is often a reduced tax rate for corporations, and they have more taxable benefits. Talk to your accountant about possible tax advantages.
- Debts: The corporation's bad debts are the company's responsibility. Be cautious when obtaining bank financing as many banks require business owners to sign a personal guarantee. This means your personal assets are at risk in the event of a default.
- Raising capital: Corporations have an easier time raising capital than a sole-proprietorship or partnership. If need be, a corporation can sell shares and raise money. This is an option not available to non-corporations.
- Sale of the business: A corporation is easier to value in the event you need to sell. The value is calculated on the worth of the business, rather than the owner.
If you need help with forming a corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel only accepts the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.