Fact checked for accuracy by Billie Anne Grigg, a bookkeeper and Mastery Level Certified Profit First Professional.
Starting a corporation can feel like a daunting process if you’ve never done it before. However, the process is more straightforward than you might think. This is especially true if you have done your research and understand the benefits of forming a corporation over other viable business entities and in which state you will incorporate your prospective business.
This article offers a clear breakdown of important aspects of forming a corporation.
Selecting Your Corporation State
One of the first steps to forming a corporation is choosing the state to incorporate your business entity. You want to incorporate in the same state you plan to do business in. Although sometimes, incorporating your company in another state could have additional attractive benefits. However, this option will cost more upfront.
You are free to choose any U.S. state to incorporate your business, but you will still need to be registered to do business in your state of operation.
Most people either choose to incorporate in the state they are doing business in or Delaware and then register the company in the states where it will conduct business.
Usually, local incorporation in your business’s home state will be the less expensive option.
However, 68% of Fortune 500 companies have incorporated in Delaware, including famous names like Google, Walmart, Disney, and Amazon. Delaware motivates business incorporation to register in Delaware via simplified corporate laws, lenient tax policies, reduced restrictions, and privacy policies.
Incorporating in Delaware
Here’s a quick breakdown of some benefits of incorporating in Delaware, which you can compare with the state in which you plan to do business.
Taxes
- Delaware has some of the most relaxed business taxes of any U.S. state. For example, if you register your business in Delaware but don’t do business in Delaware, you do not have to pay corporate income tax.
- There’s no sales tax in Delaware.
- There’s no investment income tax in Delaware.
- There’s no inheritance tax in Delaware.
- There’s no personal property tax in Delaware.
Note: While there is a franchise tax for Delaware corporations, it’s often less than the taxes charged by other states.
Investor Preference
Many investors strongly prefer Delaware C corporations over other U.S. business entities for various reasons.
- Many investors prefer Delaware corporations over LLCs because LLCs are more difficult to sell.
- Investors prefer C corporations over S corporations because all shareholders in an S corporation must be U.S. citizens, residents, and “natural persons” — the latter of which excludes Venture Capital (VC) firms.
- VCs prefer Delaware C corporations because Delaware law allows two or more types of stock. As a result, VCs often hold various stock classes, such as common stock, founder’s stock, and a variety of preferred stock.
- Delaware C corporations can distribute stock options to employees, directors, and board members as incentives.
- In Delaware, C corporations can deduct fringe benefits as business expenses. This means that neither the company nor the employee will owe income tax on the value of fringe benefits.
- C corporations pay very low taxes on kept earnings, allowing profits that were not paid out to contribute to company expansion.
Corporate Structure
- Delaware allows one person to hold various positions, such as director, officer, and shareholder. They reserve this for only LLCs or sole proprietorships in many other states.
Timely Incorporations
- Delaware’s incorporation process is swift, sometimes taking less than an hour to complete.
Privacy
- Companies declare a registered agent with a physical, official address to receive official mail and documents in most states. In Delaware, some sources say that you only need to disclose the registered agent’s name. We recommend disclosing the address too, just to be safe.
- Officers and directors are not required to disclose their names, which provides anonymity. However, this information must be listed in the annual report.
- Officers, directors, and shareholders aren’t required to maintain residency in the state of Delaware.
Corporation Court
- Delaware has a specialized court for corporate lawsuits called the Court of Chancery. It’s made of specialty corporate law judges. As a result, the state has a well-developed legal precedent that is predictable and allows somewhat easier navigation of corporate law.
- The Court of Chancery also expedites corporate lawsuits compared to if they had become a civil lawsuit in a different state. This is because Delaware uses corporate law judges rather than juries.
9 Steps to Forming a Corporation
Now that you’ve decided on the basics, it’s time to begin the incorporation process. This is one of the more exciting — and potentially daunting — parts of forming your corporation. However, this guide breaks down the process into a simple, easy-to-follow process.
Choose Your Corporation’s Name
One of the first steps to forming your corporation is coming up with the perfect business name that another entity hasn’t claimed yet. But, of course, it shouldn’t be very similar to other business entity names in use, either.
It’s good to know that some restricted words are only available to businesses operating in specific industries, such as the words “bank,” “insurance,” and “university.”
Once you have chosen a name, you will want to reserve it while making additional business preparations. This allows you to hold on to your name for a short time until you can formally incorporate the business.
Once you have reserved your name, you can get other non-legal items in order, such as purchasing your website, creating a logo and social media artwork, and ordering other marketing material.
Appoint a Registered Agent
The next step is to designate a registered agent for your business. This person ensures that your state has a reliable point of contact with your corporation. You will need the name and address of your registered agent included in your Articles of Incorporation. If you are unsure who to use as a registered agent, registered agent services exist and may be worth exploring.
File Your Corporation’s Articles of Incorporation
Now it’s officially time to form your corporation by filing your articles of incorporation. You’ve previously sorted out your registered agent and their address — so you’ll need to list this in your articles. You must also appoint people to your initial board of directors — the minimum required is usually between one and three, but check your state first. Of course, you can always appoint more directors if you choose.
Draft Corporate Bylaws
The corporate bylaws are arguably your most important business document, so draft them with care. The bylaws should give form to your corporation’s policies.
The bylaws will also cover the basic business information, including its purpose, fiscal year, and dissolution practice.
You can easily find templates for bylaws online and search for them by corporation type and state.
Apply for an EIN
Next, it’s time to get your federal tax ID number — called an EIN or an employer identification number. You’ll get this from the IRS, and it’s like a corporation’s Social Security number. The EIN is nine digits and identifies your business for taxes. You’ll also need the EIN to open a bank account or hire employees.
Meet with Your Board of Directors
It’s essential to have a first formal meeting with your new board of directors. You will want to assign someone to keep the minutes. It’s also important to discuss important aspects of your company, such as stock agreements, bylaws, appointing officers, and discussing daily business affairs.
Register for Taxes
Taxes are not the most exciting part of business for many people, but they are integral. You’ll need to register for taxes on both federal and state levels (for most states).
There may also be additional types of taxes required for your business, such as employment tax or taxes specific to your industry. It may be a good idea to sit down with a tax consultant to ensure you have all of your bases covered.
Obtain Business Licenses
You will need to check if your business will require any specific business licenses or permits. If federal agencies regulate your activities, your business will require a federal license. The fees and requirements vary by agency, activity, and state.
For example, if your business activity involves alcoholic beverages, you will almost certainly require licensing from the Alcohol Tabacco Tax and Trade Bureau and/or the Local Alcohol Beverage Control Board. The Small Business Administration offers a convenient list of activities associated with licensing agencies.
Open a Business Bank Account
It’s important that you do not co-mingle your business expenses with your personal finances against liability claims. This could endanger your personal assets rather than protect them, which is part of the point of forming a corporation.
You’ll want to get a business bank account and restrict all of your business transactions to that account.
This is also the perfect time to consider accounting software or hiring an accountant if your finances are more complicated.
Frequently Asked Questions
Can You Hire an Incorporation Service?
You can hire an incorporation service, but you can complete the incorporation without outside help, even if you’ve never created a business entity before.
However, some people feel more comfortable with an incorporation service doing the paperwork for them. There are many options for these services online, but realize that they will cost you significantly more than completing the work yourself.
What is the Best Time to Form a Corporation?
It’s a good idea to incorporate sooner rather than later. You gain the benefits of greater ease of obtaining funding; it presents a more professional image, you’ll gain limited liability protection, and you may reap some tax advantages, too.
But, is there a best date to form a corporation?
January 1 is the best date to form a corporation because it gives your business a full calendar year to operate before reporting taxes. This can ease the paperwork burden. If you are considering incorporating near the end of the tax year, it may be worth asking yourself if you can hold off until January.
Of course, there are certain exceptions to this rule. For example, suppose you’re about to sign a contract, hire employees, or add a partner. In that case, you’ll want to incorporate first for the limited liability protection, even if it’s around the end of the year.
What Is the Cost of Forming a Corporation
There are four fees to consider when incorporating:
- Fees associated with filing the articles of incorporation ($100-$250)
- Franchise tax prepayments ($0-$1,000)
- Fees for government filings ($50-$200)
- Attorney fees or Incorporation Service Fees ($0-$700)
The fees associated with filing the articles of incorporation can range from $100 to $250. Visit your Secretary of State’s website to determine how much you should expect to pay.
In the first year, you might be required (depending on your state) to pay a first-year franchise tax prepayment for the privilege of doing business as a corporation in your state. The fee is usually between $800 and $1,000, but not all states charge this tax.
The fees for the different government filings can range from around $50 to $200 in government filing fees. This is separate from the fees paid to the Secretary of State. These fees are based on the state you’re incorporating in and the type of business you’re incorporating.
You can avoid the attorney fees or incorporation service fees if you are comfortable doing the process yourself. However, if you pay for the service, many firms will charge between $500 and $700, but it can run much higher, mainly if you use an attorney and there are more complicated details and many shareholders.
Pros and Cons of Forming a Corporation vs an LLC or Other Business Entity
Depending on the business entity you choose to form, there are different benefits associated with each. The most significant difference between an LLC and a corporation is that shareholders own the corporation, and one or more people own an LLC.
The main difference between a corporation and a sole proprietorship is that the corporation is a legal entity that is entirely separate from its owners. A sole proprietorship is one of the easiest business entities to form, but it offers no liability protection for the owner.
You may also consider a professional corporation. You can read our complete guide on how to form a professional corporation for more on that topic.
Important Steps After Forming Your Corporation
After you have successfully formed your corporation, you’ll need to take a few steps to maintain the proper status of your business year after year.
It’s critical to know that annual filings are necessary to maintain your corporate status.
You must stay up-to-date on your taxes each year. In addition, many states require you to file an annual report for your business, which gives the state an overview of your business activities.
It’s also vital that the business keeps records of its business activities, including financial reports, meeting minutes, and other relevant information critical to the company.
The Last Word
Do you still have questions about the incorporation process? Send us a message, and we’ll be glad to help out in any way we can.
Filed under: Advice Columns
