Corporation formation is the process of setting up a separate business entity by a group of shareholders with the intention of gaining their benefits. Such formations are popular because they benefit the owners who form them. Corporations also provide limited liability protection to shareholders, which is a significant advantage. Let us delve deeper and learn more about the process of corporation formation and its important aspects below.
Steps Involved in Corporation Formation
Forming a corporation requires a systematic approach for which one must adhere to specific procedures. So, the owners can navigate the entire process efficiently by following the steps mentioned below.
- Pick a Name. Start by selecting a unique name for the corporation, different from existing businesses. Check the availability of names online through State websites. Most states require specific words like "incorporated" or "Inc." in the corporation's name. Also, conduct a trademark search to ensure the chosen name is not already trademarked by someone else.
- Appoint Directors. Form an initial board of directors by selecting individuals or appointing a temporary board that can be replaced later. The number of directors required varies by State. Directors are the ones who help govern the corporation and hold meetings. They also manage business affairs and appoint new officers.
- Appoint a Registered Agent. Select a registered agent in the state where the articles of incorporation are supposed to be filed. The registered agent will handle any notices or legal actions on behalf of the new corporation.
- File Articles of Incorporation. Prepare and file these specific legal documents. Remember to include the corporation's name, the place of business, and in some states, its purpose. Try to add all details of the registered agent and board members. Some states may require additional documents. The owner will receive a certificate of incorporation or formation upon approval.
- Draft Bylaws. One must create a set of bylaws that govern the internal operations and decision-making processes. Bylaws outline rules related to board meetings, shareholder meetings, decision-making procedures, and other important aspects of corporate governance. Bylaws typically are drafted and adopted during the process of incorporating a company.
- Hold a Meeting of the Board of Directors. Conduct an initial board meeting to discuss enacting bylaws, appointing officers, authorizing stock issuance, and making necessary decisions—record minutes for future reference.
- Issue Stock. Finance the corporation by issuing stock to shareholders. Record the number of issued shares. Again, consider the specific corresponding price paid by each shareholder.
- Obtain Business Permits and Licenses. Fulfill any requirements for business permits and licenses. Requirements are set by the federal, state, and local agencies where the corporation operates.
- Acquire a Separate Tax ID for the Corporation. Obtain a separate tax ID for the corporation. Get the ID from the Internal Revenue Service (IRS). This is because the corporation is a distinct legal entity.
- Open a Corporate Bank Account. Establish a separate bank account for the corporation to keep its finances separate from those of the owners.
Benefits of Corporation Formation
Entrepreneurs or owners can gain several benefits if they form a corporation. Here is a look at the common benefits in detail that can help one decide the same:
- Using Proper Legal Framework: The legal and regulatory environment in many states is renowned for being business-friendly. Most states have a well-developed body of corporate law, and some, such as Delaware, have specialized business courts and an experienced business-focused judiciary. This favorable legal climate provides firms with stability and predictability.
- Granting Strong Legal Protection: Owners can benefit from strong legal protection by forming a new corporation. The entity's structure minimizes owners' (known as shareholders') personal culpability for the organization's debts and responsibilities. Shareholders' assets cannot normally be confiscated to satisfy the corporation's debts.
- Allowing Flexible Bylaws : State law allows corporations to design their bylaws. This internal document regulates the company's activities and management with wide flexibility. Thanks to this flexibility, shareholders and directors can tailor the form, management, and ownership of the corporation to their unique needs and preferences.
- Enabling Tax Benefits: Federal and state tax laws provide many tax benefits to corporations. Many states do not apply sales tax to intangible items, but this varies by state. This may include royalties and profits from intellectual property and its subsequent sale. Furthermore, no state corporate income tax may apply to the specific corporation if it conducts business outside the state and has no taxable presence (nexus) there. Check with your jurisdiction for sales tax laws.
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Why Hire a Lawyer for Your Corporation Formation
One should consider consulting with a lawyer when forming a corporation. So, here are some important advantages when proceeding to hire the legal professional for the process:
- Legal Expertise: An experienced lawyer can guide a person through corporation formation. The person also ensures that all legal requirements are met and that the necessary documentation is prepared accurately.
- Business Structure: The lawyer can help the client determine whether a corporation is the most suitable business structure for all specific needs and goals. The professional can consider liability protection, tax implications, and long-term plans.
- Registration and Compliance: The lawyer will assist in registering the corporation with the appropriate government authorities. The same professional will also ensure compliance with all necessary regulations. The client will further get assistance in drafting the Articles of Incorporation and other required documents.
- Shareholder Agreements: The lawyer can help draft shareholder agreements that define ownership rights and responsibilities. They may also include procedures for resolving disputes in case of multiple shareholders.
- Intellectual Property: If the corporation involves intellectual property, the lawyer can assist in protecting the trademarks, copyrights, or patents.
- Contractual Matters: The lawyer can review and draft contracts and agreements related to the corporation's operations, partnerships, and commercial dealings.
- Legal Support: Beyond the initial setup, a lawyer can provide ongoing legal counsel to address any legal issues that may arise during the corporation's operations.
Key Terms for Corporation Formation
- Shareholders: Stockholders who are the owners of a specific corporation. They hold shares of stock that often represent their ownership interest in the company.
- Board of Directors: A group of individuals that the shareholders elect to oversee the management and affairs of the corporation. They make strategic decisions, appoint officers, and set corporate policies.
- Authorized Capital: The maximum number of shares a corporation can issue according to its specific articles of incorporation.
- Incorporator : The individual or entity responsible for preparing and filing the articles of incorporation with the state authorities. The process happens during the initial stages of corporation formation.
- Incorporation Certificate: A document issued by the state authorities once the articles of incorporation have been approved and the corporation is officially formed.
Final Thoughts on Corporation Formation
A corporation formation may be complex, and not everyone can do it independently. Yet, with some expertise and probable support, one can easily form a corporation. It will help them gain several benefits, including profits from the business and some tax advantages. But, once again, seeking help from someone’s legal expertise is necessary to ensure the corporation's formation does not face any hurdles. One must approach an experienced lawyer before proceeding with the entire process.
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