To legally run a business anywhere in the world, you’ll need to register a formal business structure. And starting a business in America, most likely than not, you’ll choose between opening a limited liability company (LLC) or forming a corporation. While LLCs are normally an optimal choice for smaller businesses, those entrepreneurs who plan to enlarge their company and expand their operations usually prefer to form corporations. Having been widely popular among American companies for a long time, this business type still stands strong today mostly for the growth potential it offers to business.
Notably, if you are going to open a corporation, before delving into the registration process, you need to select your state to file the paperwork. Though you can form a corporation in any of the 50 US states, some of them ensure more favorable conditions for business than others. So, it’s better to explore this issue beforehand. Meanwhile, below, we provide an informative step-by-step guide to help you figure out how to start a company in the USA and how to incorporate in your state.
What Is a Corporation?
Before forming a corporation, you need to have a clear understanding of what this type of business structure is and if it’s appropriate for your company. First and foremost, this type of entity is a winning choice for partnerships or a group of multiple individuals who decided to operate a business together. And the best thing is that the company owners could be both US citizens and foreigners. You just need to pick the proper corporation type when registering. Thus, if some of the members are non-US citizens, you’ll form a C-Corporation and when all owners are US citizens, you’ll go for S-Corporation. More than that, corporations have no restrictions on the number of members, their country of origin, and their status, which means both individuals and companies can be corporate co-owners.
To facilitate legal routines and company management, in the eyes of the law, a corporation is an individual entity. As such, it has the right to sell and purchase assets to hire employers and many other rights pertaining to a person. At the same time, this type of business structure provides essential legal protections both to the company and to its members. Thus, as a legal person, the company is legally separate from the members and will not be somehow impacted by the bankruptcy of its members. On the other hand, members are not liable for the corporation’s debts unless those debts were caused by their unlawful or fraudulent actions.
To ensure efficient business management, the corporation issues stock. In fact, corporations are the only business entities entitled to issue shares. Those shares are distributed among the company owners proportionally to their investments into the business. Legally, shareholders are business owners. Major shareholders form a corporate board or board of directors that governs and monitors the business and appoints executive officers to run the day-to-day activities of the business.
What Are the Steps to Form a Corporation?
To legalize any type of business, you’ll need to put a lot of time and effort into registration routines. However, to form a corporation, it takes much more planning due to the more complex structure of this legal entity. And, of course, you’ll have to pay a few registration fees to the state to legally set and run your corporate business.
Once you still hesitate if a corporation is appropriate for your business, the primary benefit it brings is the capability to raise funds by issuing stock, which means you’ll have an opportunity to draw third-party investments to your company if needed. However, in return, you’ll have to share the company management with other co-owners in a way. So, think twice whether you are ready to share both business management and responsibilities or prefer to keep full authority. If you gravitate to the latter option, you’d better look into other types of business entities. But if you are confident about your decision to form a corporation, these are the steps you’ll have to complete.
1. Choosing and Reserving Your Company Name
A business name is a sort of the company sartorial statement consonant with a whole business concept. It will make your company stand out among the rivals and make it recognizable for the customers and potential partners. As such, this name should not be too long or complicated and should be easy to remember. From the legal point of view, you need to create a name, which is unique and not similar to existing company names or those claimed by other entities. Besides, this name should be compliant with legal requirements of the state you incorporate in and free from any banned or restricted words.
Choosing the name, you don’t have to immediately incorporate your business. If you need some more time to prepare for opening a company, you can reserve the name for future use. Reserving your name might cost you some fee but this way, you’ll protect it for a certain period of time until you file your Articles of Incorporation.
If you target creating a brand for your business that will be noticeable and well-known in the chosen industry, it’s also advisable getting a domain for your business and registering a unique URL to build a company website afterward.
2. Filing Your Incorporation Paperwork
Your company is not legally registered until you file your incorporation papers with the Secretary of State. In many US states, the most important document is the Articles of Incorporation that specifies the company’s members and their shares and outlines the corporation’s business activities. Besides, all states require a registered agent to be appointed by the company to receive legal documents on behalf of the corporation. Note that you should choose a registered agent among individuals or legal persons (who offer this and other Incorporation Services), which have a physical mailing address in the state of incorporation. One more thing to be mentioned while filing the Articles of Incorporation is the directors who will run the initial board meeting. You’ll have to appoint no less than three initial directors.
3. Introduction Meeting With the Board of Directors
During the first meeting with the new Board of Directors, you need to define and set up the major principles of your further business efforts as well as discuss key features of your company activity, review bylaws, internal company policies, and terms of a shareholder agreement, and appoint operating officers and managers to run your company on a daily basis.
4. Registering for Taxes
Operating a compliant business in any US state is impossible without proper tax registration to pay both federal and state taxes. Thus, most states except for Wyoming and South Dakota require corporations to pay federal and state corporate income taxes. Besides, some other state- or industry-specific taxes might be applied to your company. Overall, corporate taxation is a multi-faceted and complicated thing. So, to be sure, your company has no loopholes in this sphere, you can hire a tax professional or an accountant to keep an eye on your business taxes.
5. Receiving Business Licenses
When you decide to create a corporation and register it in a certain state, to start a business on the right foot, check if your company needs a business license to operate properly. Most businesses engaged in production and commercial activities need to obtain a license from state authorities. To get more information on licenses and state permits, you can refer to a helpful resource provided by the Small Business Administration.
6. Opening a Business Bank Account
One of the major purposes of forming a corporation is to split corporate and personal finances. Hence, a separate business bank account is a must for any corporate business. This way, you’ll be able to easily track and monitor business expenses while enhancing personal asset protection.
7. Operating Your Corporation
After the formation process is complete and you are done with all the formalities, you can finally operate your business. Yet, at this stage, there are more issues to come. To keep your business running smoothly and legally, you need to pay your taxes and timely file an annual report for your business to give the state an overview of your company’s activity and revenues for the financial year. In addition, to have a clear vision of what’s going on inside your company and how your business is developing, it’s highly important to maintain detailed records of all company activities such as comprehensive financial reports, operating meeting minutes, etc.
Corporation Pros and Cons
Setting up a business, all entrepreneurs should clearly understand that any business entity has its fortes and pitfalls. And corporations are not an exclusion in this concern. While providing nearly endless potential for business growth, corporations entangle strict formalities and need much more extensive maintenance when it comes to business operation. Thus, before getting into this, we suggest considering six key advantages and disadvantages of forming a corporation so that you were able to weigh up all pros and cons in advance.
Pros to Forming a Corporation
- Limited Personal Liability: Thanks to a so-called corporate veil, corporation owners’ personal assets are protected against any corporate issues. In other words, if a company runs into debt or legal trouble, those problems won’t impact your property, be it your bank account or a house. Just remember, that you can make use of the corporate veil only if the company is in full compliance with all legal formalities.
- Stock Issue for Raising Funds: It’s one of the biggest corporation benefits pertinent only to this type of business entity. Public and private corporations are entitled to issue and sell stock to easily gain funds for business development.
- Corporate Tax Deduction: Unlike other business structures, corporations are liable to reduce their taxable income by deducting certain costs and expenses vital for business operation and growth. Thus, income-generating investments, current operating expenses as well as employees’ salaries, bonuses and health benefits are deductible providing a noticeable tax cut on an actually paid tax amount as compared to the statutory one.
- Limitless Lifespan: Normally corporations have no specific term of service and “live” until their owners agree on a company dissolution.
- Easy Ownership Transfer: Yet another big plus of this business structure is no-fuss ownership transfer. It’s just enough for the owners to decide on the stock transfer skipping all the paperwork hassle and filing fees related to LLCs or other business forms.
- Filing for S-Corporation Status: As your smaller business grows, you can file for changing your company legal status to S-Corporation, which will bring significant tax reduction. Thanks to a “pass-through” form of taxation, corporate income tax is replaced by personal tax payments.
Cons to Forming a Corporation:
- High Formation and Maintenance Costs: Overall, incorporation and support costs to open a corporation are noticeably higher than those you’ll spend on forming an LLC. For example, in Washington D.C., the cost to incorporate is $220 and filing an annual report costs $300. Those fees will vary by state and include some more fees to be paid on a yearly basis.
- Close Government Regulation: Both federal and state governments have multiple state rules strictly regulating corporate activities and operations, thus, greatly limiting their freedom and autonomy.
- High Taxes: Though all business entities have to pay a lot of taxes, the tax burden of corporations is by far the heaviest one. C-Corporations face what is called double taxation. While the company pays a corporate income tax on its own earnings at a rate of 21%, its shareholders have to pay taxes on the dividends they get from the company.
- Lack of Personal Control: Corporations are about sharing both financial responsibilities and company control. As a result, companies with a large number of shareholders and no obvious majority among them often end up with the inability of owners to dictate the actions of the board, which might lead to a sort of havoc in corporate management.
- Time-Consuming Business Maintenance: Finally, all corporate routines related to corporate business maintenance are extremely time-consuming. Not only will you have to file initial registration documents and obtain licenses but also you’ll need to keep them up-to-date afterward, not to mention annual reports and internal corporate records. However, hiring a registered agent to do that job on your behalf might solve many operational issues.
Once you are determined to launch your business and open a company to legalize it, choosing your entity type to form and where to form are the trickiest decisions to make. Despite being more expensive and time-consuming to maintain, corporations provide entrepreneurs with a formal business structure, which is more flexible than a limited liability company. Investor-friendly and engaging less personal liability, this business structure will easily grow with your company giving you enough potential for realizing your boldest business ideas and projects.
Things to Consider Before Forming a Corporation
Providing a lot of opportunities, corporations are not the easiest type of entity to manage and control. As such, they are not for everyone. So, think twice and ask yourself a few important questions before making a final decision whether to incorporate or not.
Do you feel confident about your business concept?
Though you can’t foresee how the market will treat a new business, you need to have confidence and some sort of good feeling about your business idea. So, if you are not sure your business model will work out, it’s better to regard forming some other type of business entity related to lower maintenance and formation expenses.
How high is the level of risk related to your business?
The main issue here is who will pay for the damages or debts if something goes wrong. If your business activity has a lot of risks for potential personal injury, it’s advisable to form a corporation to use the benefit of a corporate veil for protecting your personal assets. The same is true if you want to protect yourself from potential business debts. Otherwise, you can safely regard other types of entities.
Are you ready to share control over your business?
When it comes to a corporation, this type of business entity implies shared business control with other stakeholders and is exposed to multiple government regulations at both a state and a federal level. Hence, you seek exclusive control over your business, a single owner LLC or a sole proprietorship less regulated by the state might be a better option.
What are your plans for business growth?
Business growth requires investments and corporations offer the easiest way to raise capital by issuing and selling shares. Thus, this form of business structure is the most favorable one for quick business growth. Besides, if you plan to add some more members or to your business, C-Corporations or S-Corporations make changing owners or introducing new partners a breeze. Finally, in the course of time, you might want your company shares to be available to the public and again, forming a corporation is the only way to do it.
How do you feel about the drawbacks of setting up a corporation?
Before registering a corporation, make sure you are fully aware of all the negatives related to this business entity and that you are okay with those drawbacks. Among the cons we’ve reviewed above the biggest ones are heavier taxes and a large number of legal formalities to follow on a regular basis, which leads to time-consuming business management. If these disadvantages don’t seem much of a problem for you and you are ready to delegate routine management to a hired person, a corporation might be the right choice for you. 2/