For the last few decades, the corporation has been a popular business type. The number of people choosing it grows every year. What’s the reason for that? Why are corporations predominantly among the top-ranked companies in the world? How does this business structure differ from others like sole proprietorships, limited liability companies, cooperatives, and partnerships? Is it right for you? Let’s figure it out!
What Is a Corporation
According to the law, a corporation is a collective entity that is a separate legal entity from its owners. Corporations are two-tiered in structure. The tier is typically represented by shareholders and the second one is the board of directors and functionaries. In smaller companies, the same person being an owner and functionary at the same time is a common practice, which it’s not usually used in larger companies.
In terms of ways to operate a business together, corporations are particularly popular because of their unique creation and operation regulations. In the US, they are endowed with what is known as the “corporate personhood,” which allows a legal entity to have the same rights as people, namely:
- acquire assets;
- own and dispose of property;
- hire employees, etc.
Moreover, an undoubted and significant advantage of a corporation is that it’s the only business entity type with the ability to attract investments via share sales. This is what distinguishes a corporation from other similar business entity types, e.g. LLCs.
Pros and Cons of Corporations
- Limited liability. Corporation owners are not liable for their company’s debts. This means that in the event of a lawsuit, creditors will be limited in their claims. Even if the property of the corporation proves insufficient to satisfy all the claims against it in full, creditors will still be able to claim only the assets of the company but not the personal property of its owners: houses, cars, accounts, etc;
- Tax advantages. Most corporation owners are considered employees, which exempts them from paying self-employment tax;
- Issuance of shares. Corporations can receive substantial funds without giving up management or worrying about integrating new members into their structure;
- Perpetual life. The status of an independent legal entity and the possibility of transferring shares without interrupting operations allow them to operate continuously, regardless of ownership changes;
- Access to capital. Incorporation of smaller companies into a larger company provides the possibility of a rapid capital increase;
- Unique company name. Unlike sole proprietorships and partnerships, which are not independent legal entities and therefore operate under the personal names of their owners, the business name of the corporation is its exclusive property and therefore is fully protected;
- Trust. Registering a business as a corporation raises its rating in the eyes of its partners and customers, promoting extra confidence in potential investors.
- High cost. Setting up, maintaining, and developing corporations requires a serious financial and time commitment. In addition to registration fees, there’s also a business license that requires payment. Perhaps, more than once;
- Rigid structure. The composition and types of management bodies of a corporation are stipulated by law and therefore cannot be changed arbitrarily at the discretion of its owners;
- Double taxation. Once you receive the profits, you have to pay tax the first time, and then, after distributing the same funds as dividends, you will have to pay tax the second time. Thus, income is taxed at both corporate and personal levels, which creates a significant burden;
- Administrative responsibilities. Keeping a corporation running involves a lot of paperwork. The requirements may vary depending on where the business is operating, but filing annual reports and managing corporate records is a must. For large companies, this makes sense, but if you own a small business owned by two or three people, the paperwork can become unreasonably time-consuming and costly.
How Can You Form a Corporation?
So you’ve carefully studied different types of business entities, weighed their pros and cons, and decided that a corporation is exactly what you need. Now you can get down to business.
Company registration is quite a complicated process, therefore let’s break it down into several key steps for clarity.
1) Choose your business name. Choosing the right name for your corporation is one of the first and, at the same time, most important steps. The name should not only sound good but also be memorable, and meet certain requirements. Thus, choosing it can be quite challenging at times. To facilitate the process, consider the following recommendations:
Before you make your final decision, make sure the name is not already taken/registered by another company operating in your state. Check if the trademark in question is actually available.
Check the list of prohibited keywords. For example, if your business does not offer banking services, the name must not include “bank”. Also, words like “federal,” “national,” “reserve,” etc, suggesting the liaison with the Government, cannot be included;
Use corporate abbreviations. It’s always a good thing when а corporation’s name includes words like “Incorporated,” “Company,” “Limited,” “Corporation,” or abbreviations derived from them (Corp., Inc., Ltd., or Co.), which should be placed at the end of the name;
If you plan to do your business under a different name, i.e. distribute your products/services under a name other than your main business name, you might need to register a DBA (Doing Business As) name. This is a “fictitious” or “made-up” name of your company that you have to apply to indicate the name to be used. Plus, you have to verify that another business entity is not already using that DBA name. DBA doesn’t give legal protection but might be legally required in some states.
In all other cases, it’s not necessary to report the chosen name to the specialized state authorities. After you file the constituting treaty, it will be registered automatically.
2) Appoint a registered agent. At this stage of creating a corporation, the owners need to choose a registered agent. It can be an individual or a company but it always has to be a resident of the state where you plan to file the articles of incorporation and do your business. You can actually appoint your business to be its own registered agent if you have enough knowledge and time.
A registered agent will receive all paperwork addressed to the corporation, e.g. franchise tax notifications, deadline notices for annual report filings, etc., from the state government on behalf of the company. The agent will also have to timely notify the client of every important event and forward all necessary documents. A registered agent has the right to represent your business in court in case it gets involved in a lawsuit process.
Undoubtedly, professional services cost money and can be quite expensive for a startup. However, there is always a more budget-friendly option.
Many business incorporation services can help you start, run, and grow your business. Some of them, e.g. IncFile and NorthWest Registered Agent, not only provide registered agent services but also help with company registration. Others, such as LegalZoom, will help you save money on lawyers. But if you need a more comprehensive solution, ZenBusiness is an excellent choice. This company will help you develop the best solution that perfectly fits your business goals, focusing on proper management in accordance with the law, and protecting your personal data.
3) Prepare and file articles of incorporation. Articles of incorporation (sometimes referred to as the certificate of incorporation or the corporate charter) are the most important set of formal documents and regulations on which all of the corporation’s activities are based. Filing them with a government body is a very important step to legally document the creation of your corporation. It is after these articles are registered that your corporation can be officially considered formed and eligible.
As mentioned earlier, depending on where your company is based, the name of the document set may vary slightly, but the content usually includes the following pertinent information:
- the name of your corporation;
- street address;
- registered agent data;
- information about company CEOs who can also be its owners (or not);
- type and number of shares;
- procedures relating to meetings and record keeping;
- date of filing and effective date.
Thus, a corporate charter does not have to be a complicated multi-page essay at all. You can also find articles of incorporation templates, which will allow you to create a document fast and competently without any special knowledge.
The finished articles of incorporation should be submitted to the appropriate state authority, after paying the registration fee and receiving a certified copy.
4) Hold your corporation’s initial meeting. Once your corporation is officially formed, you need to develop and organize basic aspects of its future activities. For this, you will need to hold your first meeting minutes, i.e. the initial board meeting. This is a formal meeting of the board of directors of an organization and any invited third parties.
Set a convenient date and time for a quorum to discuss the following initial organizational items:
- Approving and adopting by-laws;
- Appointing of a temporary chair and secretary;
- Reporting on the filing of articles of incorporation;
- Appointing of officers that will ensure the day-to-day operation of the corporation;
- Choosing and confirming the location of your principal office;
- Choosing an attorney and an insurance company (or an accountant).
- Approving of a company seal, preparation, and issuance of the official certificates of shares;
- Issuance of shares to the initial shareholders. Individuals who have contributed money or other property to the capital of the corporation are entitled to receive a share of ownership proportional to their contribution;
- Stock Ledger. The official record of the stock of the corporation records who owns shares and how many of them have been issued, as well as any new issue of shares, their transfer from one shareholder to another, or any other event involving the creation, elimination, or movement of shares of stock, and how many are in circulation.
- Choosing a banking institution and opening a corporate bank account;
- Filing of required state reports;
- Filing for tax exemption (if you plan to become a 501.c.3 tax-exempt organization)
- Discussing employee salaries and benefits;
- Issuance of a buy/sell agreement. This document requires a shareholder to give other shareholders or the corporation the first right of refusal if they wish to sell their shares.
The law defines shares as security generally subject to all requirements of the relevant government acts, but most small corporations are exempt from registering it and paying legal and accounting fees associated with it. However, prior to issuing shares, it’s necessary to document the names of the original shareholders, the number of shares each will purchase, and how they will pay for them.
5) Tax registration. At this point, the corporation is ready to register for taxes. Mainly, there are federal and state income taxes which are taxed on business profit and are also progressive.
Corporations are classified as either regular corporations or “C corporations,” or S corporations:
- C corporations imply a double taxation system and are subject to the corporate income tax. Double taxation means that you will have to pay taxes when the corporation earns income (progressively), and then again when it distributes dividends to its owners (who then pay taxes on those dividends). Such corporations must file an income tax return at the end of each tax year. This means you will have to report your corporation’s income, gains, losses, deductions, and credits to the IRS.
- S corporations, in turn, file a special election with the IRS taxes. An S corporation is basically a status granted by the IRS that lets C corporations pass their income through to their shareholders. S corporations are pass-through (or flow-through) entities not subject to corporate income tax. You might want to study Form 1120S, U.S. Income Tax Return for an S Corporation if you want to learn how to file your taxes as an S corporation.
Keep in mind that there may also be industry-specific taxes for certain activities, e.g. estimated income tax, employment taxes (social security taxes, medicare taxes, federal income tax withholding, and federal unemployment tax), + federal excise taxes.
Don’t forget to record the minutes of the meeting with all important information (persons present at the meeting, location, time, votes, resolutions, ideas, etc. – everything a director of the company needs to know, especially if he/she is not present at the meeting). The copies of the meeting should be distributed to all the participants.
Given the complexity of tax law, the best way not to miss anything important is to consult a lawyer or accountant.
6) Acquire your business licenses. A lot of hard work has already been accomplished! You have created your articles of incorporation, held your first meeting of directors, issued your shares, and are almost ready to go. However, before the corporation starts to function, you still need to get a corporation business license and a few special documents.
Essentially, a corporation license is a permit, issued by authorities, which confirms the right to conduct a certain business within a certain area. Specific requirements may be set on the government, state, or even local level. For instance, in Chicago, the law regulates limited license corporations and imposes additional conditions for them.
7) Sign up for a business bank account. In order to protect your personal assets as a corporation owner, it is important to have a separate business bank account. Such practice ensures normal business development and allows your customers to pay the company as a whole, rather than a specific individual. By having a separate corporate account, you will be able to purchase business credit, which will greatly expand your financial opportunities.
To open a corporate account, you will need to address the bank and check the list of documents. You will probably only be asked for a copy of your articles of incorporation to make sure your business is legal. However, sometimes, a corporate authorization – an approved request of the board of directors to take specific actions on behalf of the corporation – is also required.
8) Handle ongoing maintenance requirements. After the registration and launch, a new stage of life begins for the corporation. And it too has a number of specific rules. In order to maintain your trustworthy reputation in the eyes of the state, as well as potential partners and customers, it’s necessary to pay taxes and file annual reports regularly, which is obligatory in most states. The purpose of these reports is to inform the state of significant business changes, relocation or name changes, and the appointment of a new registered agent.
Should I Hire Someone to Incorporate My Business?
As with any business, there are two main ways to start a business: do everything yourself or hire a professional and handle over all the organizational hassle. In an attempt to save money, many startups choose the first option, without even any idea of how much effort, time, and money it will take.
The lawyer services also require considerable investment. An experienced attorney who is well-versed in the volatile law will, of course, be an invaluable assistant, however, not every startup can afford to pay several thousand dollars for this.
Fortunately, we have online business formation services. Dozens of companies proven by years and thousands of customers offer their services, allowing you to avoid possible problems with documents and save money.
In terms of value for money, business creation, and registration, the following companies are among the best on the market:
- ZenBusiness. This service provider offers affordable pricing and full-featured registration services + a full year of free registered agent service in their plans;
- Northwest Registered Agent is slightly more expensive. However, apart from a one-year-free registered agent service and friendly customer support throughout the entire formation process, their list of services includes also scanning of your business documents;
- IncFile. This company offers a free business formation package (excluding state fees). And you also have a full year of a free registered agent service.
A corporation is one of the most popular business entity types in the US – and there’s a good reason for that – numerous successful cases prove its high level of efficiency, and the test of time proves its reliability.
However, corporations are not for everyone. Before choosing this type of business, you need to carefully study all the features of your company, analyze its circle of activities, structure, and development stages.
Working with documents, which you will inevitably face, will also require special knowledge and skills, so in case you have any doubts, it’s best to leave it to the above-mentioned professionals.