How to Form a Corporation
If you have a startup that has generated enough profit to justify incorporating, it may be time to formally file for incorporation. This guide gives you a general idea of the incorporation process, from deciding the corporation type to the proper procedures for filing for a corporation. Although this guide is comprehensive, it is always recommended to consult an experienced startup attorney throughout the process to ensure you are on the right track.
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Which Type of Corporation is Right for Me?
There are three options for incorporating:
- A limited liability company (LLC) provides basic liability protections with flexible taxation options – but does not provide the proper groundwork for future growth.
- An S-corporation is a smaller-scale corporation, with growth limited to 100 or fewer shareholders. S-corporations are subject to pass-through taxation, in which your business income tax may be paid directly through your personal tax filings.
- A C-corporation is the traditional corporation that many businesses incorporate as. With a standard corporate structure and shareholders, a C-corp is ideal if you’re looking for growth – but it is also subject to double taxation, along with more stringent regulatory oversight.
Which entity you choose ultimately depends on your goals and expectations for your startup business.
Read More: S Corp vs LLC vs C Corp
Many may consider filing for incorporation simply based on where they are located, but you actually have three options for jurisdiction:
- Home state. Filing in your state of residence may be a good idea, but it may depend on the state’s laws – and the ease with which you can work with their respective Secretaries of State. Although this may not be a problem if your headquarters and state of residence are the same, but if they are located in different states, any matters of business law may have difficult, complicated hurdles to overcome.
- Delaware. Surprisingly, most startups are incorporated in Delaware. This is because the state not only has a large number of major domestic corporations, but has well-established definitions of business law that make filing incredibly easy. Additionally, the state of Delaware has a special court, called the Court of Chancery, solely to rule on corporate law disputes without juries. This means that on average, any matters of business law are handled promptly rather than put on the backburner behind other legal proceedings.
- Offshore. Some startups incorporate offshore to reap the tax benefits, but this can often be ill-advised. As a startup, your first focus should be on generating profit, not your tax penalties.
Although incorporating in Delaware is the prevailing choice for most startups, it’s always recommended to consult an experienced startup attorney before making this decision.
How to Formally File for an LLC or Corporation?
Filing for an LLC is typically much simpler than filing for a corporation:
- Choose a name that complies with your state’s rules. Generally, states typically will not allow names that are too similar to each other. You may have to refer to the states’ business database for confirmation.
- File formal paperwork. This is commonly known as the “articles of organization,” but is also known in other states as “certificate of formation” or “certificate of organization.” This is short, simple paperwork to officially designate your business as an LLC.
- Assign a registered agent. During the paperwork process, you will be asked for a registered agent – an entity that receives any legal paperwork in the event of a lawsuit or other legal dispute.
- Create an operating agreement. Although these are typically not filed in an LLC and not outright required by most state law, it is essential to the everyday operation of your business. This agreement details essential rules for the operation and ownership of your business, similar to corporate bylaws in a corporation. Everything from members’ stake in the business, the official allocation of profits and losses, and “buy-sell” provisions are detailed in this document.
- Publish a notice of intent. Some states may require you to publicly declare your intent to form an LLC, either in a local newspaper or other form of public media.
- Obtain all relevant license and permits. After your LLC is officially filed, you may now need to tie up any loose ends for your business. This may include obtaining business licenses, zoning permits, sellers’ permits, or other licenses required for regular operation of your business.
Corporations generally follow the same structure. However, because they are considerably more complex, they require more thorough information. This includes:
- Setting up a corporate records book. This keeps all essential records of your corporation. It may include minutes of board meetings and stock certificates.
- Preparing corporate bylaws. Similar to the operating agreement in LLCs, this details how the corporation is to operate on a daily basis.
- Appointing an initial board of directors. An initial board of directors is necessary until the official board is elected at the first shareholders’ meeting.
- Holding the first board of directors meeting. This is where many details of the corporation can be resolved, such as appointing corporate officers, authorizing issuance of stock, and other business details.
- Issuing stock.
- Complying with any state and/or federal tax requirements and other regulations.
- Filing a statement of information with the Secretary of State.
Filing for an S-corporation is similar to the process of a C-corporation. However, you must also file IRS form 2553. This discloses your intent to have your corporation be a pass-through entity.
Can You Do All This Without a Lawyer?
It may be possible to incorporate or register as an LLC on your own, but any mistakes or unchecked processes through the filing process can result in severe consequences to your company in the near future. Even if you don’t retain a lawyer to help draft your paperwork, it’s highly recommended to at least count on the services of an attorney to double-check your forms and filings before officially submitting them.