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Forming a legal entity for your business is an important decision. Many entrepreneurs and business partners choose to form a corporation because of the liability protection, tax advantages, and flexible options for shareholders.
While the incorporation process might seem like a daunting task, using a business formation service to set up your corporation simplifies everything.
Why Forming a Corporation is Worth It
One of the main reasons why business owners choose to incorporate is to separate their personal assets from the business. If the corporation gets sued or owes money to lenders or vendors, your liabilities are limited to your investment in the company.
Corporations are appealing to investors as well. If you plan to grow your organization and raise capital from outside investors, the corporate entity structure will be advantageous to your end goal.
When you’re going through the formation process, you have the opportunity to choose between a C corporation or an S corporation. Both have advantages depending on how you plan to operate and scale the business down the road.
For example, C corps are great for anyone who wants to take their company public with an IPO. S corps can’t be publicly traded, but this structure offers tax advantages for stakeholders who want to avoid double taxation.
The corporate management structure is ideal for multiple stakeholders going into business together. Corporations have a board of directors, officers, and shareholders, with each having its own unique roles and responsibilities. This keeps everyone in check and limits the power of each individual shareholder. So one person can’t always make a final decision without the approval of others.
The Investment Needed to Form a Corporation
Overhead and operating costs aside, you can legally incorporate a business for less than $500. The state filing fee is the only mandatory cost. This fee varies from state to state and usually falls anywhere from $50 to $300.
Most states also require an annual filing fee, along with an annual report. This is another cost that varies depending on the location of your corporation. In Hawaii, the annual report filing costs just $15. But California imposes a minimum $800 franchise tax due each year.
If you go through the formation process on your own, you’ll only need to pay the state’s fee. But then you’ll have to handle things like business name searches, corporate bylaws, banking resolutions, obtaining an EIN, and filling out IRS Form 2253 for S-corp election without any help. Using a business formation service like Incfile makes this process so much easier.
These types of services add a bit to your initial startup cost, but they simplify the process. Just answer some simple questions online, and Incfile will prepare and file the articles of incorporation directly with your state on your behalf. You can also use Incfile to run a business name search, obtain an EIN, set up your corporate meeting minutes, and more.
Using an online filing service can also expedite the incorporation process. The exact timeline varies by state, but you can usually get the company formed within ten business days instead of four or six weeks.
6 Steps to Form a Corporation
The step-by-step process below will show you how to form a corporation using Incfile. You can apply the same steps to any formation service.
Step 1 – Run a Business Name Search
The first thing you need to do is choose a business name for your corporate entity. But before you do that, you must verify that another business hasn’t registered the name in your state.
If you’re forming the corporation on your own without assistance from an online formation service, this process tends to be a bit difficult. You’ll need to search through your state database, which isn’t always user-friendly. If you end up missing something and try to incorporate a name that’s been taken, you’ll have to start over from scratch, and you’ll likely lose your initial application fee.
Incfile offers a free business name search and unlimited searches with its formation packages.
This process is as straightforward as it gets.
Just type in your desired business name, choose the entity type, and select your state. Incfile will handle the rest. The software will search the business registry in the state you choose to verify the name’s availability.
If the name is already in use and you’re struggling to develop a unique name, Incfile even has a business name generator tool.
Choosing a brandable business name is really important. So make sure you don’t rush through this step.
Alternatively, you could always register a generic corporate name right now and then use Incfile down the road to register a DBA (doing business as name) or FBN (fictitious business name). This is an easy way to differentiate your company from the legal business name filed with your secretary of state’s office.
Step 2 – Select a Corporate Entity Type
Corporations aren’t a one-size-fits-all entity. Generally speaking, you have three different corporate entity types to choose from—C corporation, S corporation, or nonprofit corporation.
Regardless of the entity structure you choose, Incfile can set up your corporation in all 50 states.
Let’s take a closer look at the differences and advantages of each corporate business structure:
The default corporation type is a C corp. So if you incorporate a business without any special requests or tax designations, you’ll automatically be classified as a C corporation.
This entity type works well for large organizations and multiple investors. C corps can issue multiple classes of stock, which means they can eventually be traded on a public stock exchange. This corporate structure is very appealing to outside investors who want the potential for large gains and dividends.
It’s worth noting C corps are subject to double taxation. The company itself is taxed, and shareholders are also subject to income taxes based on profits on their personal tax returns. This taxation structure isn’t ideal for a smaller entity with just one or two owners.
Technically speaking, an S corp isn’t a type of corporation—it’s a tax designation status granted by the IRS. This designation allows the corporation to pass income to shareholders on their personal returns. The business itself isn’t taxed, therefore avoiding the double taxation of a C corp.
S corps are appealing options for organizations with a smaller number of shareholders. There are specific rules that you must qualify for if you want to apply for this tax designation. For example, shareholders must be US residents, and you can’t have more than 100 shareholders.
You can only issue one class of stock if you’re running an S corp, and you can’t take the company public.
To start an S corp, you need to file IRS Form 2253 either during or after the incorporation process. If you’re using Incfile to form your corporation, they’ll handle this for you when you’re registering the business.
Unlike the other corporation types, nonprofits don’t have shareholders or pay dividends. Instead, profits are reinvested into the organization and used towards a mission for the greater good.
The IRS gives nonprofits a tax-exemption status. When nonprofits get a 501(c)(3) designation from the IRS, it means they don’t have to pay federal income taxes. Donors also can write off contributions made to the corporation on their personal tax returns.
Step 3 – Obtain an EIN
Every legal business entity must have an EIN—employer identification number. This is also known as a TIN (tax identification number) or simply “tax ID.”
You can get an EIN for free directly from the IRS. But rather than using multiple sites and having to fill out extra paperwork, it’s easier to get an EIN directly from your online incorporation service. Incfile makes this process simple.
The cost to get an EIN from Incfile is $70. But an EIN comes free with Incfile’s Gold and Platinum business formation packages. Here’s a brief overview of those package options.
- Silver — $0 plus state fees
- Gold — $149 plus state fees
- Platinum — $299 plus state fees
At first glance, $70 might seem steep if you can just get it for free from the IRS. But when you consider the value of the Gold and Silver packages, there’s no reason to get your EIN elsewhere. Just check the box when you’re filling out the incorporation form online, and Incfile will get it for you.
Step 4 – Appoint a Registered Agent
Every legal business entity in the United States is required to appoint a registered agent. Your registered agent will handle government correspondence and service of process on your behalf.
Technically, any individual living in your state of formation could be your company’s registered agent. So you or one of the other shareholders might qualify for this.
With that said, it’s not a good idea to be your own registered agent—especially when you’re forming a corporation.
The registered agent must be available during regular business hours to receive documents in person. Legal correspondence, like a lawsuit, can’t be delivered to a PO box.
Most shareholders don’t want their personal information to be a public record, and nobody wants the responsibility to be available at a physical address during all business hours. So using a registered agent service is your best option here.
Incfile has registered agent services available in all 50 states. This is appealing for corporations that plan to grow and establish a presence in multiple locations. You can use Incfile as your registered agent service in each state where you operate.
The service starts at $119 per year, but your first year is free when you incorporate a business with Incfile.
Step 5 – Prepare and File Your Articles of Incorporation
The articles of incorporation, also known as the corporate charter or certificate of incorporation, are the official legal documents used to register a corporation with a state in the US.
The paperwork contains information like the business name, what the business does, address, registered agent, and the classes of stock being issued. Shareholder information will also be listed in the documents.
It’s essential to get these documents filed accurately and timely. Doing it on your own opens yourself up to human error, which can delay the process and add to your overall cost. But this service is included in every Incfile formation package, including the free plan.
You’ll also have the option to expedite the formation process. Check out this example with California:
As you can see, the standard California filing time is six weeks. But with Incfile, you can get this down to just five business days.
The expedited service costs $50 for the Silver and Gold packages, but is included in the Platinum plan.
Step 6 – Draft Your Corporate Bylaws and Shareholder Agreement
Finally, you need to formalize your corporate bylaws and create a shareholder agreement.
Bylaws are the governing rules for how the corporation gets run. It will include voting rights, meeting procedures, corporate record keeping, and other important information.
While your bylaws don’t get filed with your state, you still need to have them during the incorporation process. Incfile will help prepare your bylaws, and the service is included with the Gold and Platinum packages. If you’re on the Silver package, you can add bylaws to your plan for just $30.
In addition to the bylaws, you’ll also need to formalize a shareholder agreement or stockholders agreement.
This legal document is designed to outline the rights of shareholders. It will also contain vital information related to the management structure, responsibilities, and power of different roles in the company.
Shareholder agreements typically include:
- Conditions for issuing new shares
- Share transferring rules
- Percentage of ownership and valuation
- Dispute resolution
- Non-compete clauses
- Process for when a shareholder becomes incapacitated or dies
These legally binding documents must be signed and issued to all of the stockholders.
Once you’ve gone through the incorporation process, it’s time to appoint a board of directors and hold your first board meeting. This first meeting should cover topics like appointing officers, determining your tax status, and other important subjects.
Make sure your board meetings are formally documented in your corporate meeting minutes.
You should also check out our list of the best online legal services. This resource is crucial if your corporation needs to quickly access legal forms or contracts during board meetings. It’s also an excellent resource if you need to make any legal amendments to your corporate bylaws.