This brief introduction is for educational purposes only. For those considering incorporation, please seek legal and financial counsel. You dreams are stronger with a well-crafted team.
Unlike a sole-proprietorship or LLC, a corporation is an independent legal entity. The corporation is separate from, and owned by, its shareholders. The corporation itself is held legally responsible for all business actions and debts. Business stock can be sold to attract financial investors or offered to entice premier employees. If you are just starting out or planning on a very small business, corporations may be too complex and expensive for your needs. This business structure is best for larger, well established practices with more employees.
State laws will vary and you should seek legal help when forming a corporation. You should consult legal and financial professionals before making any large decisions. However, to understand the general process, incorporation requires registration of your business name, filing of required documents, and obtaining licenses or permits as needed.
Before building your brand, think and research business names. Most states will require you to include one of the following terms: Co., Company, Corp., Corporation, Inc., Incorporated, Limited, or Ltd. For more information on selecting a business name or fictitious name (DBA), see R&R’s text from earlier posts in this serial.
Before incorporating, the initial owners will appoint directors. Directors must make policy and financial decisions. Owners often appoint themselves to be the directors, but may select people who are not owners. A corporation will also appoint officers; there should be a president and a secretary, but any other positions may be developed as well.
You must file Articles of Incorporation (sometimes referred to as the Certificate of Incorporation, Certification of Formation, or Charter). Your Articles may be short and simple, which will provide your more flexibility, but they may also be more elaborate to enumerate various powers and functions. You will need to state your business name, principle office and mailing address, the number of shares (and designations of different classes of stock if actually applicable), and the name and address of the Registered Agent. Single-owner corporations can be completed by a single person, but co-owned ones will need to be signed by all owners. Every state will be a little different, and may require additional information. Depending on state fees, filing your Articles may cost several hundred dollars. Some states may require additional fees or documents.
An organization should develop bylaws in order to govern how the corporation and those involved within it will operate. Once directors have been appointed, Articles have been filed, and bylaws have been written, an initial board meeting will be held. Shareholders must meet at least once per year and record minutes. The first meeting should address company finances, adoption of bylaws, issuances of stock, and more. The directors may also decide if their “C” Corporation will instead elect for “S” Corporation status.
With ordinary C Corporations, the business itself is responsible for taxes on business profits and owners responsible for income taxes on what they received in personal salary, bonuses, and/or dividends. An S Corporation is taxed more like a sole-proprietorship, partnership, or LLC; business profits pass through to the personal tax returns of the owners. S Corps have stricter requirements than LLCs, but offer tax benefits as your revenue increases. Whereas members of an LLC must pay self-employment tax on all business income, S Corps must pay reasonable salaries and deduct payroll expenses such as Social Security and Medicare taxes, but can split any additional profits as dividends among the owners at a lower tax rate.
Start researching how to prepare for employees by visiting https://www.sba.gov/content/hire-your-first-employee. In brief, you will need an Employer Identification Number (EIN) from the IRS, worker’s compensation, employee eligibility verification, records of employment taxes withheld, and more.