Everything You Need to Know About Forming a Corporation

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(Newswire.net — September 20, 2021) — A corporation is a type of business that allows a group of people to operate a business together, while the business is entitled to corporate personhood New business statistics from the United States Census Bureau show that in August 2021 alone, more than 427,842 new business applications were filed in the US. For business success, business owners need to grasp the benefits of a corporation, know how to form a corporation and where to do so. This article will explore how entrepreneurs are able to form a corporation. For entrepreneurs looking for more information about this process, Incorporation Rocket is able to offer more information here.  

What is a corporation?

A corporation is a business entity that allows a group of people which are able to operate a business together. But while doing so, the business is entitled to corporate personhood which means it has the same rights as a person. The law sees a corporation as an individual, which allows it to purchase assets, sue or be sued, hire employees, etc. Corporations are also able to issue stock, which is owned by shareholders. Seeing that shareholders own a percentage of the company’s net worth, they are the owners of the business/corporation. 

Although the shareholders own a part of the company’s net worth, they are not able to be a manager in the business because of this. Shareholders have the responsibility of voting for directors for the corporation. These directors will then govern the corporation by appointing officers who have the responsibility of managing the day-to-day activities of the business. 

Corporations also grant legal protections to its members because the business is regarded as an individual entity. This means that it is legally separate from the members which comprise it. Because of this, the corporation’s members are not able to be liable for the corporation’s debts. They would only be held liable if the business is not maintained properly or if the owners have acted fraudulently. This works both ways, whereas the corporation will remain unaffected if one of its members goes bankrupt.



The steps required to form a corporation

1) Naming

Business owners need to create a name for the corporation which is unique and legally compliant. Choosing a business name is not a simple process. The rules for naming are not the same in all states, but the general guidelines are that the name cannot include words that are related to a government agency. If the name has incorporated restricted words, like “bank,” “attorney” or “university”, it may require additional paperwork and the inclusion of a licensed individual. Business owners are then given the option of incorporating the business immediately or to reserve the name for future use. 

2) Filing the Articles of Organization

The following step would be to register the corporation with the secretary of state. The formation documents are commonly called “articles of organization”, “certificate of formation” or “certificate of organization.” Along with the articles of organization, corporations would need to provide:

  • Full names and contact information for all founding members 
  • Business name
  • Business address
  • Length of time the company has existed
  • Registered agent’s information 
  • Information about the corporation, a mission statement, and an explanation of the purpose

3) An Initial Meeting 

The business owners would then have to hold an initial meeting with their board of directors. The meeting would have to cover key features of your business. Examples of these features are bylaws, setting up stock and shareholder agreements, and appointing officers to manage the daily business affairs.

4) Registering for taxation

Corporations have to register for taxes on both state and federal levels. The registration for other taxes, such as employment taxes or industry-specific taxes, may also be required. 

5) Obtain Business Licenses 

For the majority of businesses to operate, they will need to acquire at least one license. The Small Business Administration is able to offer business owners information on licensing in the US.

6) Business Bank Account

When forming a corporation, it is imperative to separate the business’s finances from the owners’ personal finances. The owners may be held liable for the corporation’s debts if the business does not have a business bank account. 

7) The maintenance of a corporation

Once the corporation has been officially formed, business owners need to continually address specific points to ensure that the business runs smoothly and legally. Corporations need to pay their taxes every year and it is advised to hire an accountant to assist with this. Additionally, many states require corporations to file an annual report which details the corporation’s activities throughout that specific year. 

The takeaway

Given the many benefits of a corporation, by not holding shareholders liable to debts and by providing them the option of having no responsibility regarding the day-to-day business activities, starting a corporation as a startup may be a smart step towards business success. It is very important for businesses to open a business bank account when forming a corporation to further protect themselves from debt liability.