If you are thinking of starting a business you have likely heard or been told that you should think about incorporating your business. The term “incorporation” refers to the formal process of legally forming a business as a Corporation. Incorporation can be an excellent choice for those seeking to get liability protection for owners and increase the credibility of their business. In this detailed how-to guide you’ll learn the basics of what a corporation is, why business choose a corporation as their legal business structure, how to incorporate a business and the steps to complete after incorporation.
Note: People often use the term incorporate off hand to refer to forming a business as a formal structure such as a corporation or LLC, however its important to point out that this is incorrect. LLCs are not “incorporated” and are formed through a slightly different process from that of a corporation. If you are seeking information on how to start a business as an LLC check out our detailed guide on the topic: How to Start an LLC: A Step-by-Step Guide to Forming an LLCTable of Contents:
- What is a Corporation?
- Why Form a Business as a Corporation?
- How to Incorporate: Forming a Corporation
- Steps After Forming a Corporation
A Corporation is a type of legal business structure that is recognized as separate and distinct from it owners. As a result, Corporations have many rights similar to an individual such as entering contracts, getting financing, hiring employees and owning assets. The owners of a Corporation are issued stock that correspond to their ownership interest and are known as shareholders.
Corporations are the go-to choice for most of the largest and most successful businesses that most people can name off the top of their head. Businesses like Apple, Microsoft, Google (owned by Alphabet Inc.), Coca-Cola, Tesla and Uber are all operated as Corporations. These businesses chose a Corporate business structure for many of the same reasons that any other entrepreneur would choose a Corporation. Corporations provide a variety of unique benefits that make them highly desirable structures for businesses such as:
- Personal Liability Protection for Shareholders: The biggest and most attractive benefit is limited personal liability protection provided to a corporation’s shareholders (owners). A corporation will operate independently from a legal perspective, meaning an owner won’t be held responsible for the actions of the company (in most cases). An individual can’t be held responsible for paying a debt held by a corporation, and an individual can’t be sued for something the corporation is responsible for.
- Easier Raising Capital: One of the biggest advantages of corporations is that they’re able to raise capital by issuing public shares. It’s a big hurdle to clear, but once you’re past it, you’ll have all the capital you’ll need to support and continue expanding the business.
- Increased Credibility: Corporations sound very official and very professional. If you introduce your business as a sole proprietorship, it’s not going to sound as mature or as respectable as it would as a corporation.
- Allows for Greater Scalability: Because corporations can be held by a large number of shareholders, and because they have such limited liability, they tend to scale much easier than other types of businesses. If you’re looking to grow your business to a national or international scale, a corporation is a practical must.
The process of forming a Corporation is known as “Incorporation”. The process of Incorporation can be completed in 6 simple steps:
- Choose the State to Incorporate your Business
- Determine the Legal Name of the Corporation
- Choose a Registered Agent
- Hold an Initial Organizational Meeting
- Create and File Articles of Incorporation
- Get an EIN from the IRS
Deciding which state to incorporate the business is one of the critical steps during the incorporation phase. While you can choose to incorporate in any state, generally it’s best to choose the state where the business will primarily operate from.
If you do choose a different state than where you primary operations will be, like Delaware, be advised that this will increase both your initial formation costs and annual renewal fees. In addition to your initial formation in your state of choice, you will also be required to register as a “foreign entity” in your primary state of operation. If you want legal guidance on this choice we suggest that you contact an incorporation lawyer.
Once you have determined where you’ll incorporate your business its time to come up with the name of your business. While the legally permitted naming conventions for a corporation will vary slightly from state to state for the most part they will need to include a designator that ensures that people know the business is operating under a corporate legal structure.A Corporation’s Legal Name Must Include one of the following:
For example, the well known computer and technology company Apple operates as a corporation and it’s formal legal name is “Apple Inc.”
It’s important to note that you can also choose to operate using a different and more brandable business name that is different from the legal name of your business. This can be helpful if you plan to have multiple different products or services that you want to be able to uniquely brand but want them to all operate under one company. This can be done by using a DBA (“Doing Business As”) name in combination with your corporation’s legal name.
A great example of a company that operates in a similar way to this is Google. Google is actually a subsidiary division of a larger company that is legally named “Alphabet Inc.”
Looking for more detailed advice on coming up with your business name? Check out our detailed guide on the topic:
How to Come Up with a Business Name
Steps once you have come up with a few business names
After you have brainstormed a few business name ideas you want to ensure that these names are not currently in use by other businesses and that the name is available for registration in your state. Be sure that you complete these 4 steps before finalizing your business name choice:
- Conduct an internet search.
The first step is the easiest. Give your business name a search in Google and see what comes up. This is what your customers are likely going to see if they decide to search for your business. Are there any word associations or topics that could be bad for your business? More importantly, are there any businesses you can find that are currently using this as a name?
- Check the State Secretary of State (SOS) website.
Next, check your State Secretary of State (SOS) website for registered businesses (if available). Even if you don’t find a website for a company with the name you’ve chosen, there’s a chance that one has already registered with your state. This will allow you to find out.
- Search for domain names.
One of the most important steps to take after finalizing your business name is getting a domain that matches it. Accordingly, before settling on a name, you should spend some time searching for domains. Are you able to get a .com domain with your business name? If not, who currently owns the domain? Can you buy it from them? Are they using it for their own business? What alternatives could you consider? It’s usually not a good idea to purchase a domain name that’s significantly different from your business name, but in rare occasions, it can work. If your domain name is unavailable for your current business name, consider coming up with a different business name.
- Conduct a federal trademark search.
Finally, conduct a federal trademark search to see if any other entrepreneurs have taken this business name or used this name for products, services, or other trademarked items. If you find a conflict, you may be forced to make further changes to your business name.
After you have finalized your business name choice, you need to appoint a registered agent. A registered agent, also known as a statutory agent or service of process agent in some states, is an individual or third-party company who is designated by a business to be their primary point of contact for delivery of official government correspondence like annual report notices, and service of process in the event a business is sued.
Who can serve as a Registered Agent
The rules for who can serve as a registered agent vary slightly from state to state but generally must be a person or authorized entity with a valid, physical address who will be available during normal business hours. In many cases a Corporation will choose to designate one of their founders or directors as their registered agent. This can save some money but is not always the wisest decision. There are 3 main reasons you may want to appoint a commercial registered agent:
- Ensure Compliance: Registered agent services are experts in their field and have a responsibility to get all important documents to you promptly. This ensures that you get all important notices to ensure your corporation remains compliant and pay required fees on time. If you leave this responsibility up to an individual you may have no recourse in the even that they do not act on a required notice.
- Provide a Consistent Point of Contact: Using a commercial registered agent can actually help to save money if your business grows rapidly resulting your business location changing. If the address of your registered agent changes, because of business growth or if the individual who serves as the registered agent moves, you will need to file an update with your state, which often incurs a fee. If you need to make this change often enough it could easily cost more than simply hiring a commercial registered agent to start with.
- If you are registered in multiple states: If your business operates in multiple states and you don’t have an office and/or person who is suitable to serve as a registered agent a third-party commercial registered agent can serve as your point of contact in that state making it less of a hassle and for cheaper than renting an office in that state just to comply with registered agent requirements.
The initial meeting is a monumental occasion that kickstarts your corporation’s operations. During the meeting, shareholders elect the board of directors and officers. Additional engagements include issuing stocks, deciding to adopt employee benefit plans, and choosing S or C corporation status.
Secretaries prepare various forms for taxes, stock certificates, and minutes before the organizational meeting commences. The participants sign the forms at the end of the meeting.
Here are some of the items on the meeting’s agenda.
- Appoint directors
- Create the corporations’ by-laws
- Draft the shareholder agreement
- Determine and issue stock
- Present and sign the organization’s articles of incorporation
- Adopt the banking resolution
- Present stock certificates and the corporate seal
If prospective shareholders do not have funds to pay for stock certificates at the meeting, the issuing occurs once the shareholders make payments. The certificates contain the organization’s name, the number of shares associated with the certificate, the certificate holders’ names, and the organization’s incorporation status.
In this step you’ll be filing the official paperwork to legally form your corporation with the state. This document is known as the Articles of Incorporation. Articles of incorporation outline the business’ operations and the roles played by shareholders and directors. Most states, at a minimum, provide a PDF copy of permitted versions of the articles of incorporation, and many allow for online filing of the documents directly via the Secretary of State’s website.
The required information in the articles of incorporation vary from state to state but typically include:
- The legal name of the corporation
- Mailing Address
- Registered Agent Name and Address
- A Purpose or Mission Statement
- Names, Addresses and Titles of all Directors
Once you have compiled the articles, file the documents with the secretary of state’s office and pay the required filing fee. Since the process of completing the articles of incorporation can require some legal knowledge and expertise you may want to use a online filing service to complete this process for you. They can help correct any mistakes, provide recommendations or feedback and ensure that your filing is submitted correctly.
An employer identification number (EIN) is an essential part of the corporation’s legal existence. Tax authorities use the number to identify the corporation for tax purposes. Additionally, you will find the EIN useful when hiring employees, applying for loans, and opening bank accounts.
The IRS allows businesses to apply for the employer identification number via fax, mail, or online.
An Employer Identification Number, more commonly referred to as an EIN, Federal Tax ID or FEIN is vital part of starting a business. EINs are required for businesses formed as a Corporation.
Now that you have learned how to incorporate, you’ll want to also ensure that you complete other steps to start your business off the right way. Once you business has been formed as a corporation you want to complete these steps:
- Open a Business Bank Account
- Complete State Registrations
- Obtain Business Licenses and Permits
- Establish a Business Accounting System
- Set up Credit Card Processing
- Sign Up for Business Insurance
Once you have obtained your corporation’s EIN, you are ready to open a business bank account. With the account, your business can handle a wide selection of transactions, including paying suppliers and processing card and check payments. Applying for a business credit card for your venture helps you streamline the recordkeeping of day-to-day expenditure. On the other hand, you cultivate a credit record for the corporation.Related Content: How to Open a Business Bank Account
For your corporation to adhere to relevant state regulations, register for taxes and employment registration. States impose varying requirements, and you need to check the applicable rules in your state.
Sales tax registration
To apply for a seller’s permit to remit sales tax with the state where you incorporated your business, submit an employer identification number and additional information that helps authorities identify your business. For more information, check the state’s department of revenue.Related Content: How to Get a Seller’s Permit
Employment registration (withholding and unemployment)
If your corporation has a workforce, register the business for withholding and unemployment programs. However, states like Florida do not levy withholding taxes. You can find the relevant information about your state’s employment registration requirements by visiting their offices or websites.
States, cities, and counties generally require businesses to comply with regulations by obtaining relevant permits and licenses. The full list of permits your corporation needs to comply with the rules depends on location and business activities. Acquiring the licenses is not optional because failing to comply comes with repercussions.
If you intend to distribute, manufacture, or sell liquor in one or more states, you should apply for liquor licenses. This requirement also applies to the restaurant business. Local laws may compel restaurants to obtain permits to construct an outdoor patio on their premises.
Meanwhile, businesses in sectors such as nuclear energy, brewery, firearms retail, and commercial fishery should apply for licenses and permits issued by the federal government. These sectors have higher liability levels.
Examples of permits and licenses that may apply to your corporation include:
- Signage permit
- Sales tax permit
- Construction permits
- Natural resource licenses
- Land use permits
- Fire permits
- Zoning permits
- Professional licenses
- Health and safety permits
- Alcohol licenses and permits
Natural resource licenses help protect the environment by regulating commercial activities that may impact water bodies, plants, and air quality. If your corporation works with hazardous materials, apply for the relevant licenses or permits. On the other hand, companies with offices in a residential zone also require permission from local authorities.Related Content: How to Get a Business License
When planning to start a corporation, you are sure to require a robust accounting system. A well-chosen option allows your team to track finances more effectively. The first step is to pick the ideal accounting method from one of two main systems: cash basic accounting or accrual basis accounting.
On the other hand, you can also select an accounting application to suit your needs. Although some companies still opt for paper-based bookkeeping systems, adopting an electronic system enhances efficiency and reduces errors. Some of the most popular accounting software include QuickBooks and Xero. Microsoft Dynamics 365 Business Central offers an integrated business management solution that includes an accounting system.
You can also opt for a basic bookkeeping solution based on spreadsheet applications like Excel. This option is better than paper ledgers you find at retailers offering office supplies.Related Content: Small Business Accounting 101
With countless credit card processing solutions from which to choose, you have to consider your options carefully. The solutions enable your corporation to accept payments via point of sale terminals, online platforms, and while on the go using a mobile card reader. Your chosen card processing can handle various brands starting with Mastercard and Visa. Additional brands include Discover and American Express.
Before selecting a merchant account service, estimate sales volume linked to credit card transactions. Once you have completed this step, set up an account with a reliable payment gateway. This solution differs from a merchant account provider. The gateway service handles all your company’s transactions by accepting or approving credit card transactions.Related Content: How to Accept Credit Card Payments
Purchasing business insurance is an unavoidable move that protects your corporation. Many state governments make it mandatory for businesses to get insurance to protect your firm from general or specific liability. Insurance can form part of your organization’s risk management strategy.Related Content: Small Business Insurance 101