The Ultimate Guide to Forming a Corporation: Everything You Need to Know

Are you considering forming a corporation but aren't sure where to start? You're in the right place. This comprehensive guide will walk you through everything you need to know about incorporating your business, from the initial decision-making process to the steps you need to take after incorporation to keep your corporation legal and compliant.

 

 

Why Form a Corporation?

Forming a corporation is a significant step that offers several advantages for your business:

Limited Liability Protection

One of the primary reasons entrepreneurs choose to incorporate is the limited liability protection it offers. A corporation is a separate legal entity, meaning that shareholders (owners) are not personally liable for the company's debts or legal obligations. This separation can protect your personal assets from business liabilities.

Perpetual Existence

Corporations have a perpetual lifespan, meaning they continue to exist even if the ownership or management changes. This stability can be beneficial for long-term business planning and can make it easier to attract investors.

Ownership Flexibility

Corporations can issue stock, which allows for easy transfer of ownership and can help in raising capital. This flexibility makes it an attractive option for businesses planning to grow or seek investment.

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Corporation vs. LLC: Which is Right for You?

Before you proceed, it's essential to determine whether a corporation is the best business structure for your needs or if an LLC (Limited Liability Company) might be more appropriate.

Advantages of a Corporation

• Defined Management Structure: Corporations have a clear hierarchy with directors, officers, and shareholders.
• Investor Attraction: Corporations are often preferred by investors due to their structured nature.
• Stock Issuance: Ability to issue stock can make raising capital easier.

Advantages of an LLC

• Simplicity: LLCs generally have fewer formalities and compliance requirements.
• Flexible Management: Less rigid management structure compared to corporations.
• Pass-Through Taxation: Profits and losses can pass directly to owners, avoiding double taxation.

For a detailed comparison, consider consulting legal resources or professionals to help you make an informed decision.

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Choosing Your State of Incorporation

You might think you should incorporate in a state known for being business-friendly, like Delaware. However, the best choice often depends on where you conduct your business. This guide will help you choose the best state to incorporate by comparing options like Delaware and your home state.

Incorporating in Your Home State

• Simplicity and Cost-Effectiveness: If you conduct most of your business in one state, incorporating there can save you time and money.
• Avoids Dual Registration: Incorporating in another state often requires you to register as a foreign corporation in your home state, doubling some fees and paperwork.

Incorporating in Another State (e.g., Delaware)

• Benefits: Delaware offers business-friendly laws, a well-established legal system, and is favorable to majority shareholders.
• Considerations: You'll incur additional costs like annual fees and hiring a registered agent. Also, if you conduct business in your home state, you'll still pay taxes there.

Recommendation: For most small to medium-sized businesses, incorporating in your home state is the most practical choice unless you have specific reasons to choose another state.

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Preparing to Incorporate

Before drafting your Articles of Incorporation, there are several key steps to prepare.

Selecting a Corporate Name

• State Requirements: Your corporate name must include "Corporation," "Company," "Incorporated," or an abbreviation of these words.
• Restrictions: Certain words like "Bank," "Redevelopment," or "Cooperative" may be prohibited.
• Availability Check: Use your state's Secretary of State website to ensure your desired name isn't already in use.

Appointing an Incorporator

• Role: The incorporator is responsible for filing the Articles of Incorporation.
• Who Can Be an Incorporator: You, a director, or an attorney can serve in this role. In Missouri, for example, the incorporator must be at least 18 years old.

Designating a Registered Agent and Office

• Registered Agent: This person or entity receives legal documents on behalf of the corporation. They must have a physical address in the state of incorporation.
• Registered Office: A physical address (not a P.O. Box) where official documents can be delivered.

Choosing Directors and Officers

• Directors: Responsible for overseeing the corporation's affairs and making major decisions.
• Officers: Handle daily operations (e.g., President, Secretary, Treasurer).
• State Requirements: Some states require at least a President and Secretary, who can be the same person.

 

 

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Filing the Articles of Incorporation

The Articles of Incorporation is the official document that creates your corporation.

Essential Information to Include

• Corporate Name
• Registered Agent and Office
• Incorporator's Name and Address
• Number of Authorized Shares: The maximum number of shares your corporation can issue.
• Par Value of Shares: The minimum price at which shares can be sold.
• Purpose of the Corporation: A general statement like "to engage in any lawful business activity."

Filing Process

• State-Specific Forms: Obtain the correct form from your state's Secretary of State website.
• Filing Fees: Fees vary by state and may depend on the number of authorized shares.
  • Example: In Missouri, fees are based on the dollar amount of authorized shares, starting at $50.

Submission

• Method: You can usually file online, by mail, or in person.
• Confirmation: After filing, you'll receive a certificate or confirmation of incorporation.

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Holding the Initial Board Meeting

Once your corporation is legally formed, the next step is to hold the initial meeting of the board of directors.

Key Actions During the Meeting

• Adopt Corporate Bylaws: Formalize the internal rules governing the corporation.
• Appoint Officers: Assign roles such as President, Secretary, and Treasurer.
• Authorize the Issuance of Stock: Approve the distribution of shares to shareholders.
• Set the Fiscal Year: Decide on the accounting period for the corporation.
• Approve Contracts and Agreements: Ratify any pre-incorporation contracts.

Meeting Minutes

• Documentation: Record detailed minutes of the meeting, including decisions made and actions authorized.
• Storage: Keep these minutes in your corporate records or minute book.

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Drafting Corporate Bylaws

Bylaws serve as the operating manual for your corporation.

Importance of Bylaws

• Define Roles and Responsibilities: Clarify the duties of directors and officers.
• Establish Procedures: Outline how meetings are conducted and how decisions are made.
• Conflict Resolution: Provide mechanisms for handling disputes among shareholders or directors.

Adoption of Bylaws

• Approval: Typically adopted during the initial board meeting.
• Flexibility: Can be amended as needed, following the procedures outlined within them.

Contents to Include

• Shareholder and Director Meetings: Scheduling, notice requirements, and quorum.
• Voting Rights: How votes are counted and what constitutes a majority.
• Officer Roles: Specific duties and term lengths.
• Stock Issuance and Transfers: Procedures and restrictions.

 

 

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Issuing Stock

Stock represents ownership in your corporation and is a critical step in formalizing your corporate structure.

Authorized vs. Issued Shares

• Authorized Shares: The total number of shares you can issue, as specified in your Articles of Incorporation.
• Issued Shares: The number of shares actually distributed to shareholders.

Considerations

• Par Value: Setting a low par value (like $0.01) can minimize initial capital requirements.
• Payment for Shares: Shareholders must pay the corporation for their shares, even if it's a nominal amount.
• Stock Certificates: Provide physical or electronic certificates to shareholders as proof of ownership.
• Stock Ledger: Maintain a record of all stock transactions.

Retaining Unissued Shares

• Future Needs: Keep some shares unissued for future investors or employee stock options.
• Control: Retaining shares can help maintain control over the corporation.

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Creating Shareholder Agreements

A shareholder agreement is a contract among the corporation's shareholders detailing their rights and responsibilities.

Why You Need One

• Prevent Disputes: Clarify expectations and procedures for common issues.
• Control Share Transfers: Restrict who can buy or sell shares to prevent unwanted ownership changes.
• Outline Exit Strategies: Provide guidelines for what happens if a shareholder wants to leave the corporation.

Common Provisions

• Buy-Sell Agreements: Conditions under which shares can be sold.
• Voting Agreements: How shareholders agree to vote on certain issues.
• Confidentiality Clauses: Protecting sensitive business information.
• Non-Compete Clauses: Preventing shareholders from competing against the corporation.

Legal Assistance

• Recommendation: Consult an attorney to draft a comprehensive and enforceable shareholder agreement tailored to your corporation's needs.

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Maintaining Corporate Records

Keeping accurate and up-to-date records is not just good practice—it's often legally required.

Corporate Minute Book

• What to Include:
  • Articles of Incorporation
  • Bylaws
  • Meeting Minutes
  • Stock Ledger
  • Shareholder Agreements
  • Corporate Resolutions

Importance of Recordkeeping

• Legal Compliance: Demonstrates adherence to corporate formalities.
• Audit Preparedness: Essential if you're audited by the IRS or state agencies.
• Investor Confidence: Shows professionalism and organization to potential investors.

Tips for Effective Recordkeeping

• Consistency: Update records promptly after meetings or significant decisions.
• Security: Store records securely, either physically or digitally with backups.
• Accessibility: Ensure authorized individuals can access records when necessary.

 

 

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Post-Incorporation Requirements

Forming your corporation is just the beginning. Ongoing compliance is crucial to maintain your corporate status and legal protections.

Tax Obligations

Employer Identification Number (EIN)

• What It Is: A federal tax ID number for your corporation.
• How to Obtain: Apply online through the IRS website for free.
• Why It's Important: Necessary for tax filings, opening bank accounts, and hiring employees.

Federal Taxes

• Income Tax: Corporations are subject to federal income tax on profits.
• Double Taxation: C corporations face taxation at both the corporate and shareholder levels.
• S Corporation Election: Consider filing IRS Form 2553 for pass-through taxation if you qualify.

State Taxes

• Income Tax: Most states tax corporate income.
• Franchise Tax: Some states impose a franchise tax for the privilege of doing business there.

Employment Taxes

• FICA: Social Security and Medicare taxes, shared between employer and employee.
• FUTA: Federal unemployment tax, paid solely by the employer.

Sales Tax

• Collection and Remittance: If you sell taxable goods or services, you're responsible for collecting sales tax and remitting it to the state.

Corporate Formalities

Annual Reports

• Requirement: Most states require corporations to file an annual report updating company information.
• Consequences of Non-Compliance: Failure to file can result in penalties or dissolution.

Annual Meetings

• Shareholder Meetings: Required at least once a year to elect directors and address major issues.
• Board of Directors Meetings: Regular meetings to make significant business decisions.

Corporate Resolutions

• Purpose: Document significant decisions made by the board or shareholders.
• Examples: Approving large contracts, taking out loans, issuing additional stock.

Licenses and Permits

Business Licenses

• Local Requirements: Cities and counties may require general business licenses.
• Industry-Specific Licenses: Certain industries require additional permits (e.g., health permits for restaurants).

Professional Licenses

• Professional Corporations: If you're offering professional services (like legal or medical), additional licensing is often required.

Workers' Compensation Insurance

• Requirement: Most states require this insurance if you have employees.
• Benefit: Protects both employees and the corporation in case of workplace injuries.

Bank Accounts and Financial Management

• Separate Accounts: Open a dedicated bank account for your corporation to maintain the corporate veil.
• Accounting Systems: Implement reliable accounting software to track income, expenses, and tax obligations.

Do I need a business lawyer?

The biggest question now is, "Do you need a business lawyer?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.

Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.