How to form a corporation
To form your own corporation, you must take these essential steps.
If you’ve sorted through the many types of business structures and decided to create a corporation, you’re facing a list of important — but manageable — tasks. Here’s what you must do:
- Choose an available business name that complies with your state’s corporation rules.
- Appoint the initial directors of your corporation.
- File formal paperwork, usually called “articles of incorporation,” and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.
- Create corporate “bylaws,” which lay out the operating rules for your corporation.
- Hold the first meeting of the board of directors.
- Issue stock certificates to the initial owners (shareholders) of the corporation.
- Obtain any licenses and permits that are required for your business.
Choosing a Corporate Name
The name of your corporation must comply with the rules of your state’s corporation division. You should contact your state’s office for specific rules, but the following guidelines usually apply:
- The name cannot be the same as the name of another corporation on file with the corporations office.
- The name must end with a corporate designator, such as “Corporation,” “Incorporated,” “Limited,” or an abbreviation of one of these words (Corp., Inc., or Ltd.).
- The name cannot contain certain words that suggest an association with the federal government or restricted type of business, such as Bank, Cooperative, Federal, National, United States, or Reserve.
Your state’s corporations office can tell you how to find out whether your proposed name is available for your use. Often, for a small fee, you can reserve your corporate name for a short period of time until you file your articles of incorporation.
Besides following your state’s corporate naming rules, you must make sure your name won’t violate another company’s trademark.
Once you’ve found a legal and available name, you usually don’t need to file the name of your business with your state. When you file your articles of incorporation, your business name will be automatically registered.
However, if you will sell your products or services under a different name, you must file a “fictitious” or “assumed” name statement with the state or county where your business is headquartered.
Directors make major policy and financial decisions for the corporation. For example, the directors authorize the issuance of stock, appoint the corporate officers and set their salaries, and approve loans to and from the corporation. Directors are typically appointed by the initial owners (shareholders) of the corporation before the business opens. Often, the owners simply appoint themselves to be the directors, but directors do not have to be owners.
Most states permit a corporation to have just one director, regardless of the number of owners. In other states, a corporation may have one director only if it has one owner; a corporation with two owners must have at least two directors, and a corporation with three or more owners must have three or more directors.
Filing Articles of Incorporation
After you’ve chosen a name for your business and appointed your directors, you must prepare and file “articles of incorporation” with your state’s corporate filing office. Typically, this is the department or secretary of state’s office, located in your state’s capital city. While most states use the term “articles of incorporation” to refer to the basic document creating the corporation, some states use other terms, such as “certificate of incorporation” or “charter.”
No state requires a corporation to have more than one owner. For single-owner corporations, the sole owner simply prepares, signs, and files the articles of incorporation himself. For co-owned corporations, the owners may either all sign the articles or appoint just one person to sign them. Whoever signs the articles is called the “incorporator” or “promoter.”
Articles of incorporation don’t have to be lengthy or complex. In fact, you can usually prepare articles of incorporation in just a few minutes by filling out a form provided by your state’s corporate filing office. Typically, the articles of incorporation must specify just a few basic details about your corporation, such as its name, principal office address, and sometimes the names of its directors.
You will probably also have to list the name and address of one person — usually one of your directors — who will act as your corporation’s “registered agent” or “agent for service of process.” This person is on file so that members of the public know how to contact the corporation — for example, if they want to sue or otherwise involve the corporation in a lawsuit.
Drafting Corporate Bylaws
Bylaws are the internal rules that govern the day-to-day operations of a corporation, such as when and where the corporation will hold directors’ and shareholders’ meetings and what the shareholders’ and directors’ voting requirements are. To create bylaws, you can either follow the instructions in a self-help resource or hire a lawyer in your state to draft them for you. Typically, the bylaws are adopted by the corporation’s directors at their first board meeting.
Plan for Ownership Changes With a Shareholders’ Agreement
A shareholders’ agreement helps owners of a small corporation decide and plan for what will happen when one owner retires, dies, becomes disabled, or leaves the corporation to pursue other interests.
Holding a First Meeting of the Board of Directors
After the owners appoint directors, file articles of incorporation, and create bylaws, the directors must hold an initial board meeting to handle a few corporate formalities and make some important decisions. At this meeting, directors usually:
- Set the corporation’s fiscal or accounting year
- Appoint corporate officers
- Adopt the corporate bylaws
- Authorize the issuance of shares of stock, and
- Adopt an official stock certificate form and corporate seal.
- Additionally, if the corporation will be an S corporation, the directors should Approve the election of S corporation status.
You should not do business as a corporation until you have issued shares of stock. Issuing shares formally divides up ownership interests in the business. It is also a requirement of doing business as a corporation — and you must act like a corporation at all times to qualify for the legal protections offered by corporate status.
Issuing stock can be complicated; it must be accomplished in accordance with securities laws. This means that large corporations must register their stock offerings with the federal Securities and Exchange Commission (SEC) and the state securities agency. Registration takes time and typically involves extra legal and accounting fees.
Exemptions to Securities Registration
Fortunately, most small corporations qualify for exemptions from securities registration. For example, SEC rules do not require a corporation to register a “private offering” — that is, a non-advertised sale to a limited number of people (generally 35 or fewer) or to those who can reasonably be expected to take care of themselves because of their net worth or income earning capacity. And most states have enacted their own versions of this SEC exemption. In short, if your corporation will issue shares to a small number of people (generally ten or less) who will actively participate in running the business, it will certainly qualify for exemptions to securities registration.
Passive Shareholder Rules
If you’re selling shares of stock to passive investors (people who won’t be involved in running the company), complying with state and federal securities laws gets complicated. Get help from a good small business lawyer.
For more information about federal securities laws and exemptions, visit the SEC website at www.sec.gov. For more information on your state’s exemption rules, go to your secretary of state’s website. (You can find links to every state’s site at the website of the National Association of Secretaries of State,www.nass.org.)
Issuing the Shares
When you’re ready to issue the actual shares, you’ll need to document the following:
- The names of the initial shareholders
- The number of shares each shareholder will buy, and how each shareholder will pay for his or her shares.
Finally, you’ll prepare and issue the stock certificates. In some states you may also have to file a “notice of stock transaction” or similar form with your state corporations office.
Obtaining Licenses and Permits
After you’ve filed your articles, created your bylaws, held your first directors’ meeting, and issued stock, you’re almost ready to go. But you still need to obtain the required licenses and permits that anyone needs to start a new business, such as a business license (also known as a tax registration certificate). You may also have to obtain an employer identification number from the IRS, a seller’s permit from your state, or a zoning permit from your local planning board.
If you’re ready to incorporate your business, Nolo offers the following helpful guides, which come with a CD-ROM of the forms you need:
- Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo), or
- How to Form Your Own California Corporation, by Anthony Mancuso (Nolo).
Copyright Nolo.com. Reprinted with permission.