How To Start a Corporation

A corporation is a legal entity that’s separate from its owners for legal and tax purposes. Most corporations have stock and shareholders.

Starting a corporation can be more costly and time-consuming than other business types, but it will ensure that you're not personally liable for any legal problems associated with the business.

Steps for Starting a Corporation

The seven basic steps to incorporation are as follows:

Choose a Corporate Name and Address 

Perform a corporate name search to ensure the name is unique so you don't have problems in the future. You'll file your business name as an entity at the state level, and can register it as a trademark at the federal level. Both actions help to protect your business name in the future.

Select a State To Incorporate In 

You don't have to incorporate in your home state, although it can be easier because you’ll only have to deal with one set of state tax rules and compliance regulations. But there are a number of factors to consider when choosing the location, including the cost to incorporate, tax rates, and corporate laws. 

Choose a Corporation Type 

Determine the best type of corporation for your business: C-corporation or S-corporation. 

C corp: Shareholders are protected from the corporation’s liabilities. But the business is taxed on its profits, and shareholders are taxed on distributions such as profit-sharing or dividends. 

S corp: Requires registration with the IRS and can help you avoid some of the double taxation found with a C corp. You pay taxes as if you were a sole proprietor or partner. 

Research the advantages of each and consult with your advisors before making a choice.

Name Your Company Directors 

Corporations must have a board of directors. The director positions will have to be filed within the articles of incorporation and by-laws. Check your state requirements on the number of board members that are required, as well as other regulations. 

Choose Your Share Type 

Even private corporations can offer different types of shares for shareholders. 

• Voting shares: Common shares for owners of the company; typically, one share equals one vote.
• Non-voting shares: Shareholders cannot vote, but do get the benefit of profit distributions.
• Preferred shares: These shareholders are paid distributions first and are also paid before common shareholders if the company goes bankrupt.

Obtain Your Certificate of Incorporation 

You can get this at the corporate filing office for the state in which you incorporate. This process is usually completed with the secretary of state's office.

Process and File the Incorporation 

You can complete the incorporation using a lawyer or a third-party service. No matter which option you choose, you'll need to file your incorporation with a registered agent. A registered agent is your company's official point of contact with the state.

Pros & Cons of Starting a Corporation

Pros Explained

Reduces personal liability: A corporation exists as a separate legal entity from your personal life. Any debts or lawsuits are incurred by the company, not the owner. Any business with potential for lawsuits should consult with a lawyer and consider incorporation. Incorporating will offer an added layer of protection, but it is still advisable to get business liability insurance.

May have more tax advantages: Corporations are often taxed at a lower rate and have better taxable benefits. Talk to your accountant about the tax advantages.

More financing opportunities: Financing a small business as a sole proprietorship or partnership can be difficult. A corporation can sell shares of the company and raise money easier than other business structure types.

Easier to valuate for a sale: A non-corporate business is hard to valuate properly. A business corporation value will be based on the business, not the owner, therefore making it easy to sell the company.

Cons Explained

Several legal processes involved in applying: There are many rules and guidelines you must follow in order to successfully incorporate your business. These typically vary by state.

Ongoing administrative responsibilities: Depending on your type of corporation, you'll likely need to file articles of incorporation and hold annual meetings with your board of directors. 

Annual filing fee required: In addition to an initial filing fee, you'll likely need to pay an annual filing fee to your state.

Frequently Asked Questions (FAQs)