If you run a business, forming a corporation can be a great step towards both legitimacy and expansion.
Turning your business into a corporation is a fairly straightforward process. Although there is a fair amount of paperwork involved.
Continue reading and we’ll walk you through exactly how to form a corporation so you can take your business to the next level.
What Is a Corporation?
Before we dive into how to form a corporation, let’s first talk about what it is.
A person or group of people form a corporation so that there can be a separate entity that is responsible for all of the business activity. This helps protect the individuals involved in the corporation from legal and financial setbacks that might befall the company.
To some extent, corporations are legally viewed as people. This means that corporations can borrow and loan money, hire employees, own assets, sue or be sued, pay taxes, and enter into contracts.
The most important aspect of being a corporation is limited liability. This means that shareholders can invest in and take profits from a corporation but aren’t personally responsible for the company’s debts.
Now that we know what a corporation is, let’s look at how to form one.
Pick a Business Name
One of the most fun parts about becoming a corporation, your first step is to pick the name of your business.
It’s also a good idea to include a corporate designation in your name. This is a work that shows your business is a corporation. Examples include “Limited”, “Incorporated”, and “Corporation”.
You should also check with your state’s restricted words list. This is a list of words that you can’t have in your company’s name. Common restricted words are “Insurance” and “Bank.”
You should also do a trademark search to make sure that your business name doesn’t infringe on anyone else’s trademarks. If you do infringe, you could be sued and may have to change your company’s name.
The directors of a company are usually appointed by the company’s owners. More often than not, owners will appoint themselves to be directors.
You should check with your specific state to see how many directors you need to have. Some states require that businesses have a certain number of directors based on how many owners there are.
File the Articles of Incorporation
You will have to complete and file the articles of incorporation with the Secretary of State office from your state. Some states refer to these articles as certificates of incorporation or charter.
Some states may also require you to put the names of your company’s directors in the articles of incorporation. You will also have to choose someone to be the registered agent.
The registered agent is the contact person for your company. They are going to be handling correspondence with the government and will receive all of the documents related to the corporate process.
Make Your Corporate Bylaws
The bylaws lay out the rules that are going to regulate how your company is going to be run. Corporate bylaws tend to cover things like how many directors there will be, stocks that the corporation is allowed to issue, and the procedures related to record-keeping and meetings.
Having bylaws are not required for your filings with the state. But they are helpful for running a successful corporation. It may indeed be a good idea to consult with a lawyer on how to write appropriate bylaws.
Make a Shareholders’ Agreement
A shareholders’ agreement is extremely helpful for whenever an owner retires or passes away. It’s important to note these agreements are not required for corporations.
This is a good way to protect the interests of your other shareholders.
Hold Your First Board of Directors Meeting
Whether your corporation contains multiple directors or just one, you should still hold an initial meeting for the board of directors. This will help you deal with a variety of issues, including authorization to issue stock, the appointment of corporate officers, and the adoption of bylaws.
And if you want to elect S corporation status, that is something that should be approved by the directors at the first meeting.
Issue Company Stock
If you’re running a small company, you’ll probably be exempt from having to work under the many requirements that the SEC (Securities and Exchange Commission) places on larger corporations. You’ll also most likely be exempt from the securities regulatory agency in your state.
After your board of directors has allowed for stock to be issued, you can then issue stock certificates if that’s a requirement in your jurisdiction.
Get Business Licenses and Permits
Before your corporation can actually act as an open business, you will have to get certain business licenses and permits. The requirements are going to vary depending on your local and state government.
It’s also going to depend on the industry that your business is a part of.
You can check the website of the Small Business Administration to see what permits and licenses you will need.
Register with the IRS
A corporation is a separate entity that pays its own taxes. You’re going to have to get a unique tax ID number from your local and state revenue agencies as well as the IRS.
The Importance of Knowing How to Form a Corporation
By knowing how to form a corporation, you’re already one step closer to getting your piece of the American dream.
Because state and local laws are always changing, just make sure to check up on all of the laws related to this process to make sure that you are up to date.
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