Starting a corporation is different from starting a partnership, sole proprietorship, or LLC. Here’s your handy, step-by-step guide to creating a corporation.
First off, here are the key points to know right off the bat:
- Different corporations function differently, especially when it comes to taxes
- There are certain state requirements you’ll have to comply with
- You may want to work with a service provider to get things moving more quickly and confidently
What is a corporation?
A corporation is a legal, IRS-recognized business structure which operates as a legal entity separate from its owners.
Corporations provide limited liability protection, which means shareholders may receive dividends, but aren’t responsible for any of the company’s debt. For-profit corporations can be publicly traded or privately owned. If they’re publicly owned, they usually have many shareholders, whereas private companies have a smaller group of owners.
Non-profit corporations are usually charities, and while they’re different from for-profit corporations, they are required to have a charitable mission; and any profits go toward that mission, rather than to the shareholders. In other words, the corporation isn’t trying to make a profit. Because of this, non-profit corporations may apply for tax-exempt status, but they must reinvest any additional funds back into their organization.
There are three different kinds of for-profit corporations:
- C Corp
Named for the U.S. tax code subchapter C, which determines how this type of corporation is taxed, a C Corp is the default corporation type the IRS will assign you unless you state otherwise. A C Corp is subject to corporate income tax, both state and federal, and is taxed separately from its owners. In a C Corp, you can issue several different classes of ownership shares.
- S Corp
Named for the U.S. tax code subchapter S, an S Corp has no federal corporate income tax. Rather, the shareholders each pay federal income tax based on their share of the company’s profits. To register as an S Corp, you must meet certain requirements and file IRS Form 2553. When it comes to state taxes, S Corps are treated differently based on the state.
- B Corp
B stands for “benefit.” A B Corp is classified as a company with a social mission. B Corp Certification is voluntary and awarded by the non-profit B Lab, which validates the corporation’s social and/or environmental mission. As a B Corp, you are required to report regularly so the authorities can ensure you’re still following your stated mission. If you want to register as a B Corp, it’s easier to do so right away. Just know that a B Corp will also qualify as a C or S Corp, because B Corp isn’t actually a tax classification.
Starting a corporation
When you’re first setting up your corporation, there are a few things you’ll want to do.
- Choose a name
It may seem obvious, but the first step is coming up with a name for your corporation. Make sure to check the requirements in your state and choose a name that both fits your company and won’t lead to people confusing you with another organization. Before registering, make sure the name is available by checking with your Secretary of State’s office.
- Set up a board of directors
Every corporation is required to have a board of directors. The board guides decision-making and makes sure shareholders’ interests are well-represented. In some states, your board can be one person, but others require more members. You want to choose credible, trustworthy members with good business sense, but you can always start with a temporary board of directors and change things around later on.
- File Articles of Incorporation
This document is required by every state, though the specific information required is different. Usually, you’ll need to provide your corporation’s name, address, purpose, registered agent, board members, and incorporators. You must file Articles of Incorporation before you can get your Certificate of Incorporation, and it usually costs anywhere from $50-$300.
- Write bylaws and a shareholder agreement
These are the rules for how your company will operate and how shareholders will interact with each other and with the corporation. Among other things, they detail everyone’s specific role, the process for making company-wide decisions, the place and time of annual meetings, and the bank accounts that will be used for paying out dividends. Again, check with your state to see what specific information they require.
- Get an Employer Identification Number
An EIN is like a SSN for businesses, and the IRS requires corporations to have one. It’s easy to apply for an EIN via the IRS website, but you can only do this after you’ve finished your incorporation with the state.
Running a corporation
After you’ve got your corporation named and registered, it’s time to get down to the business of running things. Here are the next steps you should complete.
- Meet with your board of directors
Before you can get down to business, you need a board of directors’ meeting to decide on basic management and operational processes. At this first meeting, you’ll appoint company officers (such as the CEO), approve the bylaws you wrote earlier, and define the accounting year. If you had a temporary board of directors while you were setting up, now is also the time to appoint a permanent board. After this initial meeting, you’ll want to set up annual meetings with the board.
- Get a business license and permit
Depending on your state, location, and industry, you may need certain licenses and permits to do business. For instance, if you sell alcohol, you’ll probably need a permit. Some states require you to have a general business permit, whatever your industry. Get this done early on, before you open for business.
- Issue stock
Now it’s time to deal out ownership of the corporation, which you do by issuing stock to your shareholders. You should have specified in your Articles of Incorporation how many shares your corporation will be able to give out. Be sure to check the regulations for your type of corporation. For example, S Corps can only issue one kind of stock, and can only have up to 100 shareholders.
Good luck!
Starting a corporation is exciting, but it can also be overwhelming. Before registering, you may want to check out the other options and make sure a corporation is the best type of business entity for what you want to do. You’ll also need to check your state and industry regulations. In most states, you can visit the Secretary of State’s office for help and support in starting a small business. But it may also be worthwhile to consult with a business attorney and/or CPA as you’re getting your corporation up and running.