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Updated: Sep 5, 2022, 2:09am
A corporation is a type of business entity that offers limited liability for owners, the shareholders. Corporations have well-established legal precedents and a uniform management structure, and corporate shares are easy to transfer from one shareholder to another. Because of this, corporations are often the favored business structure of large companies and investors. You can form a corporation yourself, use an online business formation service or consult with an attorney. Startup expenses range depending on the business needs and type.
Read our simple guide to learn how to start a corporation in 2022. We’ll walk you through everything you need to know to form your new corporation today.
Depending on your business goals and ownership structure, there are a few different types of corporations to consider. They include:
The legal and tax structure of your corporation can have a major impact on the way you run your business and the taxes you’ll pay. Consult with a business lawyer and/or certified public accountant (CPA) before you make any final decisions.
Every state has slightly different requirements for forming a corporation but, in general, you’ll want to follow these steps.
Choosing a business name is the first important step in forming a corporation. Your business name must be different from the names of existing businesses in your state. You can search name availability online at the website of the secretary of state or other state agency responsible for business filings. Each state office has specific rules in regard to your corporation’s name and you must comply with the rules of your state’s corporate division.
In general, here are a few guidelines that typically apply:
The board of directors oversees the overall direction of your company―the “big picture.” To incorporate, you’ll need to appoint an initial board, but you can replace this temporary board with a more permanent one after your corporation has been formed.
Different states have different requirements for the number of people who must be on your board. You may only need one board member or may need three or more.
To create a new corporation you will file a legal document called the articles of incorporation with your state business filing agency (usually the secretary of state). In most states, you can complete this process online. Although requirements can vary from one state to another, the articles of incorporation will typically include:
The best thing to do is research what documents are required for your articles of incorporation according to your specific state. Every state has different requirements, different terminology, different forms and filing fees.
Once the articles are approved, you will receive a certificate of formation.
Some states require corporate bylaws to be recognized legally as a corporation. Corporate bylaws are rules and regulations of a corporation outlining how it operates. You can draft bylaws either before or after you’ve submitted your corporate formation documents.
Corporate bylaws provide a roadmap for how the company will be run and how decisions will be made.
These bylaws should include:
If you need assistance with drafting this legal document, it’s a good idea to consult with a corporate lawyer. You can also find a template online, but make sure to check with your specific state regarding what needs to be included.
Once your corporation has been officially formed and bylaws have been drafted, hold a meeting of the initial board of directors. Be sure to follow the notice guidelines in your bylaws. At this meeting, the directors usually appoint a permanent board, approve the bylaws, appoint officers to run the company’s day-to-day business, establish the corporation’s accounting year and authorize the issuance of shares of stock. Minutes of all board meetings should be recorded and kept with the corporation’s records.
Issuing stock to the shareholders is one of the first formal corporate actions after forming a corporation. Make a record of the shares issued to each shareholder and the price paid.
A share of stock represents a unit of ownership. A corporation is owned by its shareholders and shareholders make a contribution to the corporation for shares of ownership. Shares authorized are the maximum number you are issued to sell. The number of authorized shares is stated in the company’s articles of incorporation.
Although small corporations are exempt from many United States Securities and Exchange Commission (SEC) regulations regarding stock issuance, it’s still a good idea to get advice from a small business lawyer to make sure you are complying with all regulations when you issue stock.
Although optional, a shareholders agreement can contribute greatly to the success of your business over the long haul.
A shareholders agreement is a contract between the owners of a small company. It determines how ownership will be managed if a shareholder dies, retires, becomes disabled or leaves the company. Signing a shareholders’ agreement in your company’s early stages can help ensure business continuity and avoid disagreements in the future.
It’s best to get help from an experienced small business lawyer who can tailor the shareholders’ agreement to your company’s specific needs.
An employer identification number (EIN) allows the IRS to identify your business for tax reporting. It is similar to a social security number, but for your business.
A corporation is required to obtain an EIN, and you’ll need it to open a bank account, set up payroll withholding and set up state tax accounts. You can get an EIN quickly and at no charge on the IRS website.
Most businesses need some type of business license or permit, but the requirements for your business will depend on where you’re located and what industry you’re in. Some states and many localities require all businesses to have a general business license. Many industries, such as alcohol and firearms sales, aviation and restaurants, require additional licenses.
The Small Business Administration (SBA) has a chart of industries subject to federal licensing. Contact your state and local governments for information about additional licenses you need in your locality.
If you plan on doing business under a name other than your corporation’s official name, you will also need to register a DBA name. The DBA name is also known as “doing business as” or a “fictitious business name.” Depending on where you’re located, you may need to register the DBA with your state, city and county. If you’ll only be using your official corporation name in your business, you can skip this step.
As a business owner, it’s important to stay informed on what is required of you after forming a corporation. The rules for running a corporation vary from state to state. Some may ask for yearly reports, require you to issue shares and hold yearly meetings as well as keep accurate and complete records, written communications, financial statements and meeting minutes. Check with your state or consult with a lawyer for more information regarding the specific requirements to remain compliant.
Choose carefully when deciding which business structure is right for you. It’s important to find the right balance of legal protection and corporation benefits that meet your specific needs.
Yes. If you are the sole shareholder, you can still form a corporation, but you must follow all the same corporate requirements to stay in compliance.
Yes. If the owner passes away or wants to sell their share of the company the business will still exist and you can sell or transfer over shares to another person.
It depends. Not all states require your corporation to have corporate bylaws, but it’s important you check with your local secretary of state’s office in which you plan to do business.
While you don’t exactly need a business plan to start a business, it’s a good idea to create one. The reason being is having a strong business plan will help you stay true to your original vision. Planning out your suppliers, goals and general growth plan will set you up for success in the future.
Natalie Cusson is a small business owner with over 15 years experience in the creative arts. She’s worked on ad campaigns for international brands such as Nike, Subaru, Polaris and Progressive Insurance – to name a few. When she’s not on set helping visions come alive, she can be found at the ocean soaking in the sun rays.
Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.
Kelly is an SMB Editor specializing in starting and marketing new ventures. Before joining the team, she was a Content Producer at Fit Small Business where she served as an editor and strategist covering small business marketing content. She is a former Google Tech Entrepreneur and she holds an MSc in International Marketing from Edinburgh Napier University. Additionally, she manages a column at Inc. Magazine.
