In light of recent congressional legislation lowering the corporate tax rate for many businesses to 21%, a growing number of entrepreneurs will inevitably be exploring how to incorporate their businesses. They’ll want to take advantage of tax savings they might not otherwise receive if they organized their businesses as LLCs, partnerships, or disregarded entities. As with any business entity type, however, the corporate structure has both benefits and drawbacks.
Disparate tax treatment and burdensome regulations could make the process of how to incorporate less attractive for some types of businesses. While it’s crucial to work with experienced attorneys and accountants to explore your options, knowing how to incorporate a business can help shed light on the benefits and drawbacks of the corporate structure—and, in turn, whether it’s a step you should be taking for your business.
Need to know how to incorporate your business? Here are the main steps you would need to take:
1. Select the state you want to incorporate your business in.
While you can incorporate your business in pretty much any state you want to—even if you don’t intend to base your main operations there—it’s crucial that you choose the right state for your business’s needs. Each state has different rules regarding how to incorporate—and the laws of whichever state you go with will ultimately govern your corporation during lawsuits, shareholder disputes, and other corporate matters.
Delaware, for example, offers favorable state corporate tax laws as well as an experienced pool of judges and attorneys that are well-versed in common corporate legal issues—which is why over a million businesses have decided to incorporate there.
If you’re considering incorporating your business in a state other than where you plan to center your business operations, make sure to appoint a designated agent to receive official notices and services of process in the state you’ll be incorporating in.
2. Choose the type of corporation you want to organize as.
Perhaps just as important as selecting the right state to incorporate in is choosing the best type of corporation entity to organize as. This is one of the first considerations to determine when you’re wondering how to incorporate since this selection could result in major tax and liability consequences depending on the selection you make.
Profits for C corporation shareholders, for example, are taxed twice—the first being a 21% tax on the corporation’s overall profits, and then again at capital gains tax rates once dividends are paid out.
Profits from S corporations, on the other hand, pass through to the shareholders and are not double-taxed. That being said, S corporations must be based in the United States, have only one class of stock, and have no more than 100 shareholders to maintain its S corporation status.
3. Choose your corporation’s name.
Finding the right branding for your corporation is crucial, and it all starts with choosing the right business name. Regardless of the name you select, however, you need to make sure that it includes the phrases “incorporated,” “corporation,” “limited,” or any related abbreviations.
You also need to make sure that the name you select doesn’t infringe on others’ trademark rights—especially if your line of business is in the same line of business as another company whose name appears similar to the one you want. So, be sure to work with an experienced trademark lawyer to research potentially conflicting names in the state you’re incorporating your business in, as well as potentially conflicting state trademarks, federal trademarks, and international trademarks.
4. Select your board of directors.
Unlike in other business structures such as LLCs and partnerships, your corporation needs to appoint a board of directors. While boards are not involved in the day-to-day operations of the corporation as much as C-suite executives and managers are, they play major roles in hiring executives, determining shareholder dividends, approving business loans, and more.
As you go through the stages of how to incorporate your business, you must appoint members to serve on your initial board—which can include investors, officers, co-founders, or other individuals not affiliated with the corporation.
5. File and sign your articles of incorporation.
To officially register your company, you also need to file articles of organization with the secretary of state’s office in the state where you’re incorporating. While the information required for each state’s articles of incorporation form varies, they generally require entrepreneurs to disclose the name of the corporation, the registered office where the corporation is located, the contact information of the corporation’s registered agent, the purpose of the corporation, and the contact information for the incorporator.
Entrepreneurs who are forming stock corporations will also likely need to include information detailing the total number of shares being issued as well as the par value—or starting value—per share.
6. Issue shares and certificates to your shareholders.
One of the attractive features of the corporation format is the ability to issue and sell shares—allowing accredited investors and the public to participate in the purchasing and selling of shares in your company.
When starting a corporation, you have to allocate shares and issue certificates to each of the initial owners at the time of filing the articles of organization so that the ownership structure is clarified from the outset, making it so you and your stakeholder partners can figure out how to best allocate your shares heading into potential investor and stakeholder negotiations.
7. Prepare corporate bylaws.
After you file your articles of incorporation, it’s good practice to develop a written set of corporate bylaws. Bylaws define the responsibilities of a corporation’s shareholders, directors, and executives, and can be helpful for resolving disputes among these groups regarding important topics such as officer compensation, shareholder voting, and approval procedures for loans and business contracts.
8. Observe corporate formalities.
By electing to register as a corporation, you’ve decided to go with using the most regulated business organizational structure. Failing to hold board meetings, commingling your business and personal funds, and undercapitalizing your business are among to receive the legal liability and deference protections usually granted to business owners.
So, it’s important for you and your other shareholders to regularly hold board meetings, timely file corporate tax returns, open separate bank accounts for your business, and conduct other expected day-to-day corporate organizational tasks so that a litigating party cannot go after your personal funds and property during litigation—otherwise known as “piercing the corporate veil.”
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If you’re wondering how to incorporate your business, we hope this guide has served as a helpful starting point. Before you commit to a corporation, make sure you’ve considered every entity type and are ready for the responsibility that comes with running a corporation.
Good luck!
The post How to Incorporate a Business: A Step-by-Step Guide appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/how-to-incorporate
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