How to Incorporate a Business: A Step-by-Step Guide

The term “incorporation” refers to the process of constituting a company as a legal corporation. A corporation can be considered as an artificially created legal entity that runs separately from the owners who created it.

In other words, a corporation separates personal liabilities from business liabilities, which is great because you will not be held personally accountable for any corporate debts and such, within limits.

This is one of the reasons why business owners find it easy to run their business as a corporation than any other form of business structure.

Why incorporate?

Aside from unlimited liability, there are so many other advantages in incorporating a business. The most important ones are given below.

• Unlimited life

The lifetime of a corporation is not dependent on the lifetime of its owner(s). Therefore, it can continue to run until its goals are met or until it faces bankruptcy, even if the owners are no longer alive. This is not the case for sole-proprietorships and partnerships.

• Easy to transfer ownership

Selling, or transferring ownership to someone else in a sole-proprietorship or partnership is a very difficult and cost-heavy task. Even at the slightest change in ownership, new deeds have to be drawn, property titled and so many other administrative steps have to be taken.

However, in corporations, all the rights and privileges of individual owners are represented by the equity shares they hold. Therefore, they can easily sell or transfer ownership by signing over a single document called the stock certificate.

• Tax benefits

Corporations, especially the S type ones, enjoy certain tax benefits since the income generated goes through the accounts of individual shareholders.

• Can raise capital easily

Investors will be more willing to invest in a incorporation than a sole-proprietorship or partnership due to benefits such as unlimited liability and ease of transferring ownership.

How to incorporate?

Let’s now look at the steps you need to follow to fully incorporate your business without leaving any room for errors.

• Decide on the corporation’s name

The name of your corporation must be unique, short, memorable, and easy to pronounce. Check the name against the state secretary’s business name database to see whether or not it’s available for registration. If it’s not available, just brainstorm until you come across a name which is.

• Appoint directors to the board

You can’t incorporate a business that doesn’t have a board of directors or BOD. Therefore, as the CEO, it is your responsibility to appoint the directors to the board but if your business has multiple shareholders, they all need to place their votes when making such appointments.

The names and contact details of the directors should be written down and signed by them in the incorporation paperwork. Also, it’s recommended to assign each director an official role in the corporation before submitting the paperwork.

If for some reason the board of directors change, you will have to notify the state regarding this matter by filing a statement of information, which we will get into later in this article.

• Choose between the different types of corporations

Go for a C type corporation if you own a large-scale business with over 100 shareholders, otherwise, you are better off going for a S type corporation. C corporations are separately taxable and the taxes should be paid at a corporate level.

There is also a risk of being taxed twice when corporate income is distributed among shareholders as dividends. In such an occasion, you will have to pay the income tax of your corporation at a corporate level and then pay again for the tax on dividends you received at an individual level.

The main reason behind why investors and venture capitalists prefer C corps. over S corps. is because they have common as well as preferred stock.

However, S corporations enjoy certain tax benefits since corporate income is passed through the accounts of shareholders, therefore no income tax is paid at the corporate level.

Also, you don’t need a separate Tax Identification Number or TIN if you own a S type corporation. You could just use your personal Social Security Number or SSN to reduce the tax on both corporate and individual income.

Don’t worry, if a S corp. isn’t enough you can change back to a C corp. anytime you want. It’s not permanent.

• Contact the state secretary for guidance

The state secretary of your particular state has the authority to handle all matters relating to incorporation of businesses. He or she may guide you through to other government institutions that can help you in the process of incorporating your business, and even direct you to places where you can get the necessary forms.

• Acquire the articles of incorporation

The documents that make up the articles of incorporation differ from one state to another so I highly recommend consulting the state secretary for guidance. Most of these documents aren’t free. You will have to pay a certain fee to obtain each one of them.

Typically, the articles of incorporation need to contain the name of your corporation, its purpose, and the names and addresses of each director on your board.

• Get in touch with a corporate lawyer

Some entrepreneurs attempt to complete the incorporation paperwork by themselves in order to save the expense of consulting with a corporate lawyer but what if you make a mistake?

Corporate laws are quite complex and a single mistake may cause a lot of financial trouble in the future. Therefore, I highly recommend consulting with a corporate lawyer before signing the documents.

Be sure to choose a lawyer who has no stake or ownership in your company in order to avoid biased suggestions.

• Pay incorporation fees

After filing the articles of incorporation, you need to pay incorporation fees. Again, the exact amount differs from one state to another so you need to discuss about this with the state secretary of your state.

• Publish a notice of incorporation

Certain states require newly formed corporations and LLCs to publish 1-3 announcements in a local newspaper or journal for a certain period of time. This is done to inform the public about the formation of your legal entity.

It’s best if you publish the notice of incorporation on the very next business day after filing the articles of incorporation. Contact the state secretary for more information.

• File a Statement of Information form

If your corporation is located in California, you will be required to file a Statement of Information every year. This statement is used to keep the secretary of your state up-to-date with the changes done to your business. These changes may include hiring new executive staff or changing the address of your business.

Keep in mind that the first Statement of Information should be filed within 90 days after forming your corporation or LLC. Failing to meet the deadline will result in a $250 fine and a suspended status on the state secretary’s business records. You could file the statement online as well.

• Obtain a Tax Identification Number

C corporations are required to obtain a Tax Identification Number from the Internal Revenue Service by filing the application form SS-4.

This is not necessary for S corporations since the owner can just use his/her personal Social Security Number instead. This will reduce the tax amount for both corporate and personal income.

What is a foreign corporation?

A corporation is considered as a foreign corporation in the states other than the one where it was incorporated. It may be required to obtain a certificate of authority to conduct business in other states.

If you conduct business without registering as a foreign corporation of a state you will probably loose access to that state’s courts and even face some fines and penalties.

State filing fees for a foreign qualified corporation is much higher than the filing fees for a domestic corporation. These foreign qualified corporations are subjected to tax and annual report fees from both the state of incorporation and the qualifying state.

Therefore, the so-called “advantage” of incorporating a business in a state with the lowest initial filing fees and corporate income tax is no longer valid if you still have to conduct business in your own state.

If you are not sure whether your corporation is transacting business in another state, consult an attorney for guidance. But in general though, you can often determine whether or not a corporation is transacting business in a foreign state by asking the following questions.

• Does the corporation have a physical presence in another state?

• Do any of the employees live in another state?

• Does the corporation accept orders from another state?

• Does the corporation have a bank account in another state?

If you can answer “Yes” to any of these questions, that means you are transacting business in a foreign state.

Please note that accepting orders from other states via phone, email, or internet does not necessarily equal transacting business but then again, please contact your attorney further guidance.

Rules to follow as a corporation

There are many rules you are required to follow by law as a corporation. Breaking those rules may force the court to hold you personally liable for the business’s debts. Let’s now take a look at some of the most important rules you need to follow.

• Make sure that your corporation’s financial records are accurate and show a clear separation between the corporate finances and personal finances.

• Must file annual reports.

• Must hold annual meetings to elect new officers and directors, even if they are the same people as the shareholders. Be sure to record the starting and ending times of those meetings for emergency purposes.

• Check-in with the state secretary to be informed about your corporate status.

• Check all previous contracts and documents to see whether or not you have indicated your name correctly. If your name is “John Doe”, the signature line should read “John Doe, CEO, Example, Inc.”, not just your name. Rectify accordingly.

• Don’t use DBA or Doing Business As on contracts anymore and correct the previous ones.

• All references to the business must include either Inc. or Corp.

• Never use corporate checks for personal reasons and vice versa.

Conclusion

Incorporating a business comes with many benefits such as unlimited liability, unlimited life, easy transfer of ownership, and etc. Choosing between either a C or S corporation is entirely up to you and the investors to decide.

Most investors prefer to work with C corporations since they allow preferred stock but I don’t recommend this for small businesses with less than 100 shareholders due to the risk of double taxation.

Also, don’t be care-free after incorporating your business. You have certain rules to follow as a corporation so make sure you adhere to them.

Comment below what additional steps you took when incorporating your business. We would really appreciate that.