Corporations have long been one of the most popular and widespread business entities in the US. The US Chamber of Commerce notes that a corporation is, “completely separate from its owners and has its own legal rights — meaning a corporation can sue, own and sell property, and sell ownership in the form of equities.” This makes corporations a compelling form of business entity to many aspiring entrepreneurs or businesses.
What is a Corporation?
Corporations are an interesting form of business entity as they afford businesses a certain set of rights. This is known as ‘corporate personhood.’ Corporations are formed by a group of people who collectively run a business together. A dynamic facet of corporations is their ability to issue stock and possess shareholders. These shareholders own a percentage of the company based on the size of their stock. This also entitles shareholders to their percentage of the company’s net worth. How much ‘say’ a shareholder has in a corporation varies. Traditionally, voting shareholders are able to collectively elect a director. The chain of command goes from there.
Corporations are legally distinct from their members. This is important, as it provides owners and shareholders with liability protection. In the case of debt, legal trouble, or bankruptcy, this protection is vital for members.
How to Form a U.S. Corporation in 8 Steps:
Forming corporations in the US is a time consuming process. It also requires a certain amount of capital to set up, as registration fees apply. The process of forming a corporation requires attention to detail as well as rigorous documentation.
1. Select a Name
This step might seem obvious, but it is incredibly important from both a brand identity point of view, and a legal standpoint. Business names need to be compelling, but they also need to be available. Two businesses cannot have the same name, nor can they be too similar. When a business has chosen their name, they can either choose to incorporate their business right away, or they can opt to reserve their name.
An often overlooked step in the initial stages of business formation is securing a domain name. In 2022, a business website is almost vital. Securing a domain name that reflects the chosen business name should be very important to burgeoning businesses.
2. Appoint a Registered Agent
Registered agents are the connection between corporations and the state. All communications between the state and a business will go through the business’s designated registered agent. The registered agent’s obligations can vary, and many companies choose to task them with more, in order to offer owners and members respite. It is important to select the right person for this role, and ensure that all documentation is filed correctly.
3. Articles of Incorporation
In most states, the document that officially forms a corporation is called the ‘articles of incorporation.’ A corporation cannot be considered a corporation without this document being filed. Businesses need to assess their state requirements for this procedure, as they vary. It is necessary for businesses to have already appointed their registered agent at this point because their information and address is required. Directors also need to have been appointed at this stage in the formation process.
4. Create Corporate Bylaws
Corporate bylaws detail company specific policies. When drafting this, businesses need to include details and information about the company, its purpose, directors and officers, and much more. Creating this document can be very time consuming, as it requires rigorous detail and attention.
5. Acquire an EIN
An EIN, or federal taxation ID number, is a mandatory step in forming a corporation. This is acquired from the Internal Revenue Service (IRS). This step allows the state to recognize a business for tax purposes, but it also allows businesses to gain access to business bank accounts and the right to hire employees.
6. Register for Tax
Corporations need to register for both state and federal tax. This step often necessitates the aid of an accountant or tax professional. It is important to understand tax implications across states, as well as the various forms of tax that any business may encounter.
7. Acquire Business Licenses
Different industries require different licenses. As a result, businesses need to come to terms with the licensing requirements of their industry, and acquire them quickly. Additionally, some states require general licenses to operate a business within that state.
8. Set up a Business Bank Account
Corporations offer an effective separation between member and business. As a result, it is beneficial to have a business bank account, which will serve to separate personal finances from the business.
Final Thoughts
Corporations are popular due to their capability for shared ownership, liability protection, and shareholder capacities. Unfortunately, they can be difficult to form and often require a period allocated just to the formation process. This can be arduous. There are many steps in the process, and businesses need to have their documentation, business structure, and components ready before filing.
