The process of incorporation, explained (for founders)
Learn the process of incorporation: steps, advantages, disadvantages, and key considerations when forming a corporation for your company.
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1 minute
October 10, 2024
Pia Mikhael is a guest contributor. The views expressed are theirs and do not necessarily reflect the views of Rho.
Incorporation transforms your business into a separate legal entity. This change can affect everything from how you're taxed to how you're protected from liability.
The process of incorporation might seem daunting at first but breaking it down into manageable steps can make the journey less overwhelming.
In this guide, we'll walk you through the basics of incorporation whether you're just starting to explore the idea or you're ready to take the plunge.
Key highlights:
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Incorporation is the legal process of creating a separate entity for your business, distinct from its founders and owners.
It establishes your company as a legal person in the eyes of the law with its own rights and responsibilities.
Incorporation provides a legal structure that shields the personal assets of business owners from the company's liabilities. The process typically involves filing documents with the state, creating bylaws, and establishing a board of directors.
This formal structure, recognized by law, may open doors to new growth and investment opportunities for your business.
Companies don't necessarily need to incorporate, but many consider doing so for the protection of personal assets, easier access to capital, and the perpetual existence of business.
However, some small businesses or sole proprietorships may choose not to incorporate if they have low liability risk or want to avoid the costs and administrative burden of incorporation.
The decision to incorporate ultimately depends on each business's specific needs, goals, and circumstances.
It's advisable to consult with legal or financial professionals to determine the suitable course of action for your situation.
The core difference between a Limited Liability Company (LLC) and a Corporation lies in their structure, ownership, and tax treatment.
An LLC combines elements of partnership and corporate structures, offering flexibility in management and taxation. It's often simpler to form and maintain.
A Corporation has a more formal structure with a board of directors, officers, and shareholders. It faces more regulations but can be advantageous for larger businesses or those planning to go public.
The choice between an LLC and a Corporation depends on your business goals, size, and plans for future growth.
The key difference between S Corporations (S Corps) and C Corporations (C Corps) is how they are taxed.
C Corporations face double taxation. The company pays corporate tax on its profits, and then shareholders pay personal income tax on dividends they receive.
S Corporations, on the other hand, have pass-through taxation. The company's income, losses, deductions, and credits pass through to shareholders, who report them on their personal tax returns. The company itself doesn't pay federal corporate taxes.
Starting a corporation is an exciting journey but it comes with its fair share of paperwork and decisions.
To incorporate your business, you'll need to file articles of incorporation with your state.
The filing includes essential details such as:
Once the state approves your filing, your corporation officially exists as a legal entity.
Remember, each state has its own specific requirements for articles of incorporation, so be sure to check your local regulations before filing.
Closed corporations are the private clubs of the business world. Shares of stock are typically held by a select group—often founders, family members, or early investors. They maintain privacy and don't trade on public stock exchanges.
Public corporations, on the other hand, are open to everyone. They sell shares on stock markets, which means that they are subject to more regulatory oversight but that they have easier access to capital.
Corporations are regulated at multiple levels:
Beyond these, corporations may be required to adhere to a variety of other laws including, but not limited to, labor regulations, environmental standards, and consumer protection measures.
The extent of regulation often depends on a variety of factors, including, but not limited to,your corporation's size, industry, and whether it's publicly traded or privately held.
Let's walk through the process of incorporation together, step by step.
Before you dive into the process of incorporation, it's important to make sure this structure fits your business goals.
Think about factors like liability protection and your plans for growing the business.
Compare the benefits and drawbacks of forming a corporation with other options like LLCs or partnerships.
If you're not sure what's right for you, consult with legal or financial professionals to determine the suitable course of action for your situation.
When it comes to picking a state to incorporate your business, it's not just about going with where you live.
So, before you make a decision, it's worth doing a bit of homework. Look into what different states require, how much they charge, and what perks they offer.
Your corporation's name is its identity in the business world.
It needs to be unique within your state of incorporation and comply with state naming rules.
Though different states have different rules, most want you to add abbreviations like “Inc.” or “Corp.” at the end to show it’s a corporation.
Before you get too attached to a name, it's a good idea to do a quick search to make sure no other business in your state is already using it.
If you really love your name and want to protect it, you might consult with a legal professionalabout how best to do so.
Every corporation needs someone to be its official mail collector—that's what a registered agent is.
This person or company is in charge of receiving official papers on behalf of your corporation. It could be legal documents, tax notices, or other official correspondence.
You could do this job yourself but many business owners prefer to hire a professional service to make sure nothing falls through the cracks.
One important thing to remember: whoever you choose as your registered agent needs to have an actual physical address in the state where you're setting up your corporation.
This document includes basic details about your company, including its name, what it does, who your registered agent is, and the number of shares you can issue.
Just keep in mind that there's usually a fee you need to pay when you file these papers.
Bylaws are the internal rules for how your business will run. Think of them as the playbook for your corporation.
They usually include details like what the directors and officers do, how shareholder meetings should be held, and procedures for issuing stock.
While bylaws are usually not filed with the state, they are crucial internal documents that provide a roadmap for your team.
Writing good bylaws can help prevent confusion and keep your business running smoothly as it grows.
After your corporation is officially up and running, you may consider hosting your first board meeting.
This is where you'll agree on those rules we talked about (the bylaws), choose who's going to be in charge of what (like picking a president or treasurer), and make some important decisions.
Don't forget to take detailed notes during the meeting—these are called minutes, and they will be the official record of what your corporation decides to do.
If you're planning to have more than one owner in your corporation, you'll likely need to issue stock.
This is like dividing up ownership of your company into little pieces. You'll need to decide how many of these pieces (or shares) to create and how much each one is worth.
Make sure to keep a record of who gets what shares and when—this information will be important when it's time to do your taxes and if you ever want to bring in new investors.
Depending on what kind of business you're running and where you're located, you might need different permits and licenses to operate legally.
These can include things like general business licenses, professional licenses, health permits, or zoning permits.
It's important to do some research to find out exactly what you need at the federal, state, and local levels to make sure you're following all the rules.
Incorporating your business is just the first step; there are ongoing tasks you need to keep up with to maintain your corporation.
These include holding yearly meetings, keeping detailed notes (or minutes) of those meetings, filing annual reports, and keeping your financial records in order.
The time it takes to incorporate a business can vary depending on several factors including the state or country where you're incorporating, the type of business entity, and the processing methods used. Many states offer expedited processing if you're willing to pay an additional filing fee.
Incorporating your business can offer several key benefits that help support growth and stability. Let's take a look at the main advantages:
Incorporated businesses often find it easier to get funding. You can sell shares of your company to investors, which is a great way to bring in money to grow your business. This can be really helpful if you're looking for venture capital or planning to expand in the future.
One of the biggest perks of incorporating is that it helps protect your personal assets like your house or car, from your business debts. If something goes wrong with the business, the shareholders usually only risk losing the money they've invested in the company.
While incorporating a business offers several benefits, it's important to consider the potential drawbacks as well. Here are some of the main disadvantages:
Setting up and running a corporation isn't free. There are costs to file the paperwork, maybe some legal fees, and ongoing business expenses to keep everything in line with state rules. These costs can add up, which might be tough for small businesses or startups with limited budgets.
Running a corporation is generally more complex than other business types. You'll need to set up a board of directors, write up bylaws, and have regular meetings. Managing all of this can be tricky, especially if you're a small business without a team to help with all the paperwork and planning.
Incorporation is the legal process of creating a corporation, a separate legal entity from its owners. The stages typically include choosing a business structure, selecting a unique name, filing articles of incorporation, drafting bylaws, and fulfilling state requirements.
Forming a corporation involves the following steps:
The main difference lies in structure and taxation. A corporation is a more formal entity with a board of directors and shareholders, and it may face double taxation (C Corp) or pass-through taxation (S Corp). An LLC offers more flexibility in management and typically has pass-through taxation. LLCs are often simpler to set up and maintain.
Yes, you can start a corporation as a sole owner. Many states allow single-member corporations, where one person can be the sole shareholder, director, and officer. However, you should still comply with all corporate formalities, such as holding annual meetings and keeping minutes, even if you're the only participant.
When you incorporate, your business becomes a separate legal entity. This means it can own property, enter contracts, and be held liable independently of its owners. Incorporation provides limited liability protection, opens up opportunities for raising capital through stock sales, and may offer tax advantages.
Incorporating your business helps you protect your personal assets, raise money, and maybe save on taxes. But it's not all smooth sailing—there are some tricky rules to follow and costs to consider in the process of incorporation. The key is to understand what you're getting into so you can make the right choices for your business.
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Note: This content is for informational purposes only. It doesn't necessarily reflect the views of Rho and should not be construed as legal, tax, benefits, financial, accounting, or other advice. If you need specific advice for your business, please consult with an expert, as rules and regulations change regularly.