If you own a business in the USA, you will benefit from forming a corporation.
A corporation is a legal business structure separate from its owners and offers certain protections in case of lawsuits or bankruptcy.
If you aren’t sure whether to form a corporation, here are ten benefits of forming one.
How to Form a Corporation
1. Choose a Business Name
First, you need to pick a business name. The name can’t be the same as another business in your state, and it has to end with an appropriate suffix (like “Corp.” or “Inc.”).
You can check with your local government office for more information about naming restrictions.
- Your business name can’t be the same as a corporate name, trademark, or service mark already on file with your state government.
- If you want to use special characters like apostrophes and hyphens, check first for rules about whether they’re allowed and how many characters can be used.
- You may need to register your business name as an “exclusive right” with your county clerk before filing it with the Secretary of State.
- Business owners may also have to prove that their names are “distinguishable” from existing names on file according to standard filing procedures outlined by the Secretary of State (SoS).
2. Check Availability of Name
Next, check to make sure another company doesn’t already take your business name.
There are two ways to do this:
- Check your state’s corporation database ( SoS ) for existing businesses that might be using your desired name.
- You can also check online federal databases, available at the U.S. Patent and Trademark Office site (USPTO).
3. Register a DBA Name
If you can’t find any other businesses already using your desired business name, it’s safe to file the Articles of Incorporation.
However, if another company is already using your desired name, you will need to reserve it as a “Doing Business As” (DBA) name for one year before filing with the Secretary of State.
Check online federal databases available at the USPTO site for existing federally registered names similar to yours.
You can also check your state’s corporation database ( SoS ) for existing businesses that might be using your desired name.
4. Appoint Directors
The next step is to appoint at least one director.
- The number of directors can’t be less than three or more than fifteen, but you can always change the number later on when amending your Articles of Incorporation.
- To qualify as a director, an individual has to be 18 years old and legally competent with no legal disabilities preventing them from acting in their own financial interest.
- You can appoint yourself as a director if you wish. Directors don’t have to live in the state where the corporation is formed or even the country – but they do need to consent in writing for their appointment once it’s filed with the SoS, which requires it to file annual reports and keep track of changes made to the Articles of Incorporation.
5. File Your Articles of Incorporation
After you name the directors, you need to file your Articles of Incorporation with your state’s Secretary of State or Corporation Commission.
If your articles are accepted, they will be filed and sent to you within 1-2 weeks.
You also get an official Certificate of Incorporation after filing that proves that your corporation is officially formed.
6. Write Your Corporate Bylaws
After you file your Articles of Incorporation, it’s a good idea to write down rules for running the company in your Bylaws.
These include things like the number of directors and officers, where you’ll hold meetings and how often they’ll be held, and what kind of quorum is required to make decisions.
Your corporate bylaws should also note whether memberships will be issued or sold to any business investors – but if they are, remember that corporations can only sell shares valued at $100 or more (and the price cannot go below $0.01).
7. Draft a Shareholders’ Agreement
If you plan to have investors in your company, it’s a good idea to draft a Shareholders’ Agreement.
This will help determine how the profits are divided, what happens if someone wants to sell their shares or leave the company, and more.”
8. Hold Initial Board of Directors Meeting
After you appoint directors, they must hold an initial meeting to elect officers and adopt the bylaws.
You can have this initial board of directors meeting after filing your Articles of Incorporation with the SoS or at any time before.
The number of directors cannot be less than three or more than fifteen, but you can always change the number later on when amending your Articles of Incorporation.
9. Issuance of Stock
If your company is issuing stock, it’s time to record the names and addresses of your first shareholders and how many shares they’re getting.
You can issue $100 or more (and the price cannot go below $0.01). But remember that corporations can only sell these shares valued at $100 or more – you can’t create new value through loans, financing transactions, etc.
10. Obtain Business Permits and Licenses
You’ll need to get a business license for the city, county, and state in which you’re going to do business. If you plan on soliciting outside your state or country, you may also need a special permit from the U.S. Securities and Exchange Commission (SEC).
Also, remember that if your corporation is planning on doing business abroad – either with foreign people or companies or conducting financial transactions with them – it must comply with any local laws and registration requirements there as well.
11. Register With the IRS and State and Local Tax Agencies
The IRS requires you to register as a corporation if your total assets are over $5,000 and gross receipts go over $25.
If you’re paying taxes as a corporation, it’s beneficial to take advantage of the tax deductions, benefits, and loopholes available through it – even if those don’t apply to other types of businesses.
In some states, you’ll also need to pay additional state taxes.
12. Open a Corporate Bank Account
Before you can start accepting funds, you’ll need to open a corporate bank account.
It would help if you made sure that your board of directors or shareholders authorizes the signers on the account to do so.
Pros and cons of a corporation
There are many benefits and drawbacks to incorporation.
- One of the main ones is that the owners and shareholders no longer have any responsibility for actions taken by the corporation.
- Only the corporation will be liable if something goes wrong, such as a lawsuit or unpaid taxes. This is one of the major reasons companies choose to incorporate – it makes it easier to separate personal assets from those of the business.
- Another benefit is regulation; an incorporated company has legal guidelines and restrictions on what they can and cannot do, whereas an unincorporated business does not (though this isn’t always a positive thing)
- One disadvantage of incorporation is that corporations must pay taxes on their profits twice: first as corporate profit and then as individual income tax when dividends are paid to shareholders.
- Another disadvantage is that corporations must follow more formal procedures than unincorporated businesses, such as stricter bylaws and separation of officers’ duties (one person cannot be president and treasurer).
- Finally, costs and fees associated with incorporation can be quite expensive: everything from filing fees to tax preparation or legal assistance may need to be included in the initial costs.
How Much Does It Cost to Incorporate?
Many factors can determine the cost of incorporation.
- Incorporating something like a business service company will cost less than incorporating something like an app or online game, which requires further development work.
- Then there’s where you incorporate – each state has different fees associated with incorporation, and not all states allow foreign companies to incorporate in their state.
- Once you know what your company does and where it will be established, this should help determine how much money needs to be set aside for incorporation.
- The last factor is how complicated your particular situation is; the more legal requirements that need to be satisfied, the higher the initial costs are likely to be.
However, because costs vary quite a bit from one service to another, it’s recommended that you do your own research before deciding on a separate legal entity.
For example, if you’re forming a limited liability company (LLC) in California for under $500, then you can pay around $300 at LegalZoom or Nolo.”
Types of corporations
There are two basic types of corporations: C and S.
A simplified explanation is that C corps. raise money from investors and then use that money to provide goods and services, whereas S Corps. Distribute all profits directly to shareholders without taxation at the corporate level.
All but six states permit both types of the corporation:
- South Dakota
- Texas (as well as Puerto Rico allows only C Corporation, while those in Maine allow only Corp).
In determining which type of corporation is preferable, it’s important to understand how each will affect your company’s taxation and its own filing requirements.
For example, an LLC taxed as a partnership would have to file a federal informational return (IRS Form 1065) that discloses each partner’s portion of the profits. In contrast, a corporation must file a federal income tax return (IRS Form 1120).
Taxation for an LLC taxed as a partnership is filed on IRS Form 1065. In contrast, C Corps. and S Corps. are also required to file an informational return with the IRS on Form 1120 annually, but only if the company has annual gross receipts of over $5 million or total assets of more than $10 million at any point in time throughout that year.
Therefore, depending on what your company does and how it operates, you might want to consider these key differences between the two types.
- An LLC can have more members than a Corporation while staying small enough to qualify for pass-through taxation (i.e., avoiding federal income tax at the corporate level).
- An S Corp. can issue stock, while a C Corp. cannot issue anything other than common stock and preferred stock. The holders of preferred stocks must be paid before any distributions are made to common shareholders if dividends become necessary. There can only be one class of voting stock in existence for an S Corporation.
- A Corporation is taxed when it earns income regardless of whether it distributes this money back to its owners/shareholders. When the corporation eventually liquidates, it does not cause an immediate tax liability since no money has been distributed to shareholders.
- Unlike Corporations, limited liability companies (LLCs) face double taxation because they are taxed as a separate business entity. As such, business owner/shareholder pays personal income tax on the money distributed to them from business profits.
- An LLC can provide liability protection against “piercing the corporate veil” by increasing its credibility with customers and vendors. Piercing the corporate veil means a court ignoring your business operations and treating you as a regular individual.
- LLCs are not subject to double taxation if they do not have any employees. This benefit does not apply to Corporations or S Corps.
- There is no limit on how many shareholders an LLC can have, while C Corps. cannot have more than 100 shareholders.
- In both cases, anyone associated with your company must be assumed liable for any debts incurred by your company.
- Corporations do not have to be owned by U.S. citizens, whereas LLCs and S Corps. Must be owned by either a U.S. citizen or resident alien at all times.
Whether you’re a sole proprietor or own a corporation, your business should be insured in the event of unexpected accidents.
1. Carry General Liability Insurance
This insurance protects your business from any lawsuits filed by clients or customers for property damage or bodily harm, or personal/advertising injury.
The cost of general liability varies depending on how much coverage you get and where your business is located, so you’ll need to talk with several agencies to get an accurate price quote.
Like other types of insurance policies, general liability costs are usually paid monthly or annually.
2. Protect against Property Damage and Theft
Water and fire damage can cause extensive damage to both equipment and furnishings, which is why it’s important to protect yourself against it and anything else that might damage your property. Your insurance company will decide how much coverage you should have, but as a rule of thumb, it’s better to be safe than sorry – so the more protection, the better!
3. Make sure Employees are Covered
All employers and employees bound by federal laws must carry workers’ compensation insurance. This type of policy pays out benefits for any injury sustained on the job, which results in lost time or medical expenses.
Workers’ comp policies usually cost about one percent of the employee’s salary per year; they may also include provisions for life insurance and disability coverage.”
What licenses and permits do you need?
The requirements you’ll need to meet will depend on the industry your business falls under. For example, if you’re starting a retail store, you’ll have to deal with business licenses and sales taxes.
If your operation is related to food, then there’s also an inspection that needs to be completed by local health authorities.
There are generally more stringent licensing laws (e.g., doctors and lawyers).
How Are Corporations Taxed?
In the U.S., corporations are taxed separately from their owners, and as a result, they usually end up paying more tax than a sole proprietorship or a partnership might.
Because there’s a separation between you and your business, all of its profits and losses go onto its own tax return each year – which means you won’t have to pay tax on those earnings personally. However, a corporation does have a major downside: double taxation.
If you take all of the money your company makes after paying taxes and put it in your own pocket, you’ll have to pay income tax on that amount again. Luckily there are legal methods to avoid the issue if you so choose.
Is Starting a Corporation Right for Your Small Business?
Deciding whether or not to incorporate will depend on several factors, including the type of business you run and how much money you have available.
And while a corporation can offer some tax benefits, it also has higher operating costs due to additional legal requirements that may need to be met depending on the industry.
What is the Best State to Start a Corporation In?
If you’re wondering what state is the best place to start a corporation, here are several of the most popular states for incorporating based on their corporate tax rate, ease of formation, and legal requirements.
Florida does not have an income tax, so it’s often considered one of the best states to incorporate in. It also has easy online incorporation forms with quick processing times.
This state makes starting your own business easy by allowing residents to form LLCs or corporations without going through any additional legal steps.
There are no personal income taxes either, which means that money distributed by your company can go straight into your pocket without any extra charges!
Delaware is known as one of the easiest states to incorporate because you can create your business online.
It does not have an income tax either, making it a good option for incorporating small businesses to save on costs.
Can a Non-Citizen Start a Corporation in the USA?
Unfortunately, a non-citizen can’t start a business in the U.S. by themselves. However, there are exceptions if they have been living as permanent residents for at least five years and can prove filing income tax over those five years.
It is possible to incorporate as an LLC or corporation if you have a work visa. Before doing so, make sure you speak with a professional familiar with your specific situation, as many types of visas will disqualify you from filing any tax return.
What is a Registered Agent?
You’ll need to find someone who can act as your registered agent before you can start your own business.
Registered Agent/Service Duties:
- This person will be the one receiving all court notices, tax forms, and other important official documents related to your business.
- You may also want to consider hiring a professional company like LegalZoom, which offers registered agent services at reasonable rates (you’ll spend around $119 per year on average).
- Professional corporations usually have their own agents or lawyers who act as their agents; it’s not required, but it makes life easier when dealing with legal matters involving the business.
- An agent basically serves as a point of contact between your small business and any outside sources (whether they be creditors, customers, or government agencies).
- A registered agent is responsible for accepting any official mail or documents on behalf of your small business so that you don’t have to deal with them directly.
It’s a good idea to hire an agent even if your company doesn’t require one because it makes the service of process of starting a new business easier overall.
Do Corporations Have Yearly Filings?
Yes. Corporations are required to submit yearly reports in most states before a certain deadline.
If the reports are not submitted on time or if additional fees are not paid, it’s possible your corporation could lose its right to exist, which means you’ll have to file all over again if you want to keep operating under that business name.
When starting a new business, there are several things entrepreneurs must do.
Many of these steps may be completed with the help of an attorney or other legal professionals. Still, one step that can generally be taken care of online is applying for tax identification numbers like Federal Tax ID Numbers (EIN).
What is an EIN?
An Employer Identification Number (EIN) is a nine-digit number used to identify a business or sole proprietorship.
EINs are required for businesses with employees, and they’re equally important for business entities that don’t have staff members on the payroll.
The main purpose of an EIN is to help the Internal Revenue Service (IRS) keep track of company earnings and profits.
The IRS requires all corporations and LLCs to obtain an EIN to pay federal government tax and file official documents like Form W-2 at year’s end.
Applying for an EIN is easy; all entrepreneurs need to submit a simple application via the IRS website.
What kinds of businesses should do filing as a corporation?
A corporation is a good choice for any business that wants to separate itself from its owners and limit its personal liability.
This doesn’t mean you can’t take money out of your corporation, but it does mean it will be more difficult for creditors or the government to go after your personal assets if something goes wrong.
Legal professionals recommend corporations as the best way to operate if you want to expand your existing small business down the road, and there are many tax benefits.
Corporations also tend to be easier to manage than other company forms because they have bylaws that clearly outline how things should work within the organization.
Starting a business is an exciting time for entrepreneurs, but it also comes with several responsibilities.
While not all of these tasks have to be completed to get your company off the ground, you should certainly try and do as much as possible before officially launching your small business.