If you have a small business that you’re ready to expand, you might be looking at how to incorporate.
But what is a corporation, exactly, and how do you incorporate? First, let’s define some terms.
• A corporation is a business entity that is separate from its owners, who are known as shareholders. A corporate structure is one way to protect business owners from being held personally liable for the company’s actions.
• Incorporation is the process of forming a legal corporation. After incorporation, a company gains certain legal rights and protections while also taking on new compliance responsibilities.
You can incorporate your business in six steps. Depending on your state and city, the specifics may vary, but overall the steps remain generally the same.
Key Points
• Choose a business type based on your commercial goals and legal needs.
• Pick a corporate name that follows local rules and doesn’t duplicate others that have already been registered.
• Select a board of directors to manage the business on behalf of owners.
• File articles of incorporation paperwork with your state; you’ll have to pay a fee.
Get the necessary licenses to legally operate. This is especially important for professional corporations.
Step 1: Choose Your Business Structure
To set up an incorporated entity for your small business, start by choosing your business structure. Many types of business entities, such as limited liability companies (LLCs), partnerships, non-profits, and cooperatives, can incorporate. When you’re deciding on your business structure — weighing a sole proprietorship vs LLC, for example — consider your company’s goals, needs, and legal requirements.
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There are various types of corporations, each offering business owners an array of specific benefits. Here are several ways you can incorporate.
• A C corp is an individual entity that’s independent of the business owners. This is the default corporation type. C corps are subject to corporate income tax.
• An S corp is a pass-through entity, meaning that the corporation can bypass paying corporate tax on its income and pass the profits through to the shareholders. Each shareholder will then report the income on their personal income tax returns. To qualify as an S corporation, a corporation must meet specific criteria such as having fewer than 100 shareholders, issuing just one class of stock, and restricting ownership to only individuals or certain trusts and estates.
• A benefit corporation is a mission-driven entity that also pursues profit. It pays corporate taxes as either a C or an S corp. Typically it reports each year on the public benefit it provides. Not all states recognize this type of business entity, though. (It’s important to bear in mind that benefit corporations are not the same thing as “B corporations.” The organization B Lab grants “B” certification to corporations that meet its ethical and structural criteria.)
• A nonprofit corporation can apply for exemption from state and federal income taxes. However, it must abide by specific requirements and regulations to maintain its status.
• A professional corporation is a specialized entity that allows licensed professionals to access the benefits of operating as a corporation. Setting up an incorporated entity in this way may help professionals who use costly machines, such as dentists, secure equipment financing. Each owner has personal liability protection from the negligence of other owners, but not from the outcomes of their own actions.
Not all business entities are corporations, or need to be. Consider which option will make your small business ideas work best. An LLC, for example, is not formally a corporation, but can elect to be taxed as if it were.
Forming a corporation may help with funding. You have the option of selling stock in your company. Also, banks offering small business loans may prefer to lend to an incorporated business. Nevertheless, there are some alternative small business loans that you can get without formal incorporation.
Step 2: Select a Business Name
Choose a unique name for your business. The business name will need to comply with the jurisdiction’s regulations; consult your local secretary of state or equivalent for your area’s rules. It’ll save time if you check your state’s corporation database to make sure your desired business name isn’t already in use.
You should also check the official trademark database with the U.S. Patent and Trademark Office to avoid trademark infringement. If your desired business name hasn’t been registered there yet, you may want to trademark the name to prevent others from using it.
If you plan to operate your business under a different name than the one you register, you will need to establish it as a “doing business as” (DBA) name.
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Step 3: Appoint Directors and Officers
Because corporations are standalone legal entities, they have to have boards of directors who will act on behalf of the shareholders (owners). Corporate shareholders elect the board members. Board members can include company executives and non-employees. Directors often have structured and defined roles and responsibilities within the company.
The required number of directors depends on the state and the corporate structure of the business. The board of directors must meet at least once a year; some states allow virtual meetings.
Step 4: File Articles of Incorporation
The most obvious step in setting up an incorporated entity is filing articles of corporation, also known as a certificate of incorporation. In the articles of incorporation, you will need to provide information about your business. This typically includes the name of your corporation, the business address, the business purpose, the registered agent, the names of the directors, and the number and value of the shares the corporation will issue. Articles of incorporation are submitted to the secretary of state’s office in the state where the corporation is located. There may be a fee for filing articles of incorporation.
Additional documents may be required for forming and maintaining a corporation. Examples include the business name reservation form, corporate bylaws, operating agreements, meeting minutes, board resolutions, a shareholder agreement, or annual reports.
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Step 5: Obtain Necessary Licenses and Permits
You might need to obtain licenses or permits for certain types of businesses. There are different requirements for licenses and permits in different business industries and jurisdictions. Some of the most commonly required licenses and permits include a general business license, an employer identification number (EIN), a sales tax permit, industry-specific licenses, and a DBA (doing business as) registration. Bonus: Submitting these documents when applying for a startup loan could well boost your credibility with a lender.
Step 6: Create Corporate Bylaws
Bylaws are the legal document that establishes rules and guidelines for how the business operates. Some states require that all corporations have bylaws, but even if your state does not require them, bylaws are still helpful for the corporation to run smoothly. Bylaws are for internal use, and may include information like the standards for business operations, the responsibilities of the officers and shareholders, and the required frequency of meetings. The bylaws should be feasible for your business and should not interfere with the authority of your board of directors or state business laws.
The Takeaway
Incorporating your business can take time, effort, and money. However, the benefits of incorporation are often worth it. Incorporation provides tax benefits, liability protection for shareholders and directors, credibility, and ease of raising capital. Given the varied requirements among states, it’s worth checking with a tax professional to see what type of corporation matches your needs.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What are the essential steps to incorporate a business?
The steps for incorporating a business include choosing a business structure, selecting a business name, appointing directors and officers, filing articles of incorporation, obtaining necessary licenses and permits, and creating corporate bylaws.
How do I choose the right state for incorporation?
When choosing a state for incorporation, consider factors like your business goals, the locations where business will be transacted, state regulations, state tax laws, state privacy laws, fees, and legal implications within the jurisdiction.
What documents are required for incorporation?
The required incorporation documents will vary by location and type of corporation. Some of the documents that are needed for incorporation may include the business name reservation form, the articles of incorporation or the articles of organization, corporate bylaws, operating agreements, meeting minutes, board resolutions, a stock certificate, a shareholder agreement, and annual reports.
What are the ongoing compliance requirements after incorporation?
After the business is incorporated, the business will need to distribute an annual report to shareholders, maintain corporate records, hold regular meetings, and fulfill tax obligations. States have different ongoing compliance requirements.
How long does it take to incorporate a business?
The length of time to incorporate a business will vary depending on the state. In some states, it can take as little as 10 days, while in others the process may eat up a month or more. Check with the secretary of state office in your area for specific incorporation processing times. Some states offer expedited incorporation options for an additional fee.
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