How To Start A Corporation In 2021 | Easy Step By Step Guide

Starting a corporation
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When you decide to start up a business, one of the things that come to mind is the form your business will take. Are you going to run a sole proprietorship business, a partnership, or a Corporation?

A sole proprietorship is a form of business whereby you manage all the assets, liabilities, income, expenses, and daily operations alone. The partnership involves the coming together of one or more people with a common goal, in this form of business, the number of partners should not exceed 20.

Starting a corporation means you’re really to delegate duties to people, a corporation is a legal entity that is separate from its owners, it manages its business and daily operations with or without the owners.

Deciding on which form your business will take depends on your aspirations and goals about the future for that business.

What is a Corporation?

According to Wikipedia, a corporation is an organization, usually a group of people or companies authorized by the state to act as a single entity and recognized as such in law for a certain purpose.

A Corporation is a legally recognized entity that is separate from its owners, it has a life of its own, it can sue and be sued, collect loans, pay for tax, own assets, owe liabilities, employ people, and so on. Corporations possess and enjoy the same rights as individuals.

Corporations are formed when individuals called shareholders, decide to partake in the ownership and formation of a corporation, through holding stocks to achieve a common purpose. A corporation can be for profit or not for profit.

Why Start a Corporation?

There are a lot of benefits associated with starting a corporation, which are not enjoyed by other forms of business like sole proprietorships or partnerships. The benefits outweighs the downsides.

Benefits of starting a corporation includes:

  • Limited liability
  • Perpetual existence and continuity
  • Management
  • Legal actions
  • Retirement plan
  • Capital
  • Transfer of ownership
  • Tax advantage
  • Records

1. Limited Liability

Corporations are distinct from their owners, whatever affects a corporation doesn’t affect the owners, shareholders can partake in the profit-sharing through dividends but they can not be personally held for the corporation’s liabilities.

It provides limited liability coverage for its shareholders, in case of liquidation, personal properties and belongings of its owners cannot be claimed by creditors. 

2. Perpetual Existence and Continuity

Corporations enjoy an unlimited lifespan, the existence of a corporation doesn’t depend on its shareholders’ life. Even if the initial owners pass away or decide to sell off their shares it won’t threaten the continuation of the corporation.

Corporations run and operate for years unless the owners decide to close it down and this also depends on the majority vote of the board of directors.

3. Management

Shareholders vote and elect a board of directors to oversee the operation and management of the daily activities of the corporation. 

In a corporation, diverse departments are formed to manage different operations, this creates a structured and organized entity. 

Corporations have the right to sue and be sued in their own name without involving the owners. Lawsuits cannot be filed against its shareholders in case issues arise between the entity and other individuals or other companies. 

5. Retirement Plan

Retirement plans and savings towards providing a good retirement settlement for management and employees can easily be established in a corporation.

6. Capital

Corporations can easily raise money through the sale of their shares. Moreover, banks are always willing to lend money to corporations than other forms of business.

7. Transfer of Ownership

A corporation and all its assets and liabilities can easily be transferred through the use of a stock certificate. Ownership can be transferred amongst individuals or other corporate bodies through buying and selling of shares.

8. Builds Credibility and Prestige

Incorporating a business can easily build a trustworthy reputation and good name with suppliers, customers, banks, employees, government, etc. Besides, a corporation’s name sounds more attractive than a sole proprietor or partnership. 

9. Tax Advantage

Corporations enjoy tax advantages like deduction of health insurance premiums paid for owners or employees, saving on self-employment taxes, workers compensation, medical insurance taxes, corporate profits are not subjected to social security.

10. Records

Corporations keep their financial records and accounts separate from that of it’s shareholders or owners.

It will avoid any confusion or issues arising from keeping them together, as money meant for the business could be spent on personal welfare.

What are the Challenges That Come With Starting a Corporation?

Anything that has an advantage will most certainly have a disadvantage, no matter how small. Below are the challenges associated with starting a corporation:

  • Double taxation
  • Long application process
  • Expensive
  • Rigid formalities, protocols, and structure
  • Delay in decision making

1. Double Taxation

A lot of corporations are usually taxed twice, that is, the corporation’s profit is taxed, on a corporate level, as well as that of the shareholders based on their percentage of dividend, on a personal level. 

2. Long Application Process

The process involved in starting a corporation could be a lengthy and tasking procedure, you’ll have to go through a thorough paperwork to carefully check and document the information of the business and it’s ownership.

3. Expensive

Starting and operating a corporation involves a lot of money and spending, you’ll have to source for a start up capital, pay filing charges and incur other expenses involved in running a corporation. States too might charge you a lot of money to start up a corporation but this depends solely on your choice state for running your business.

4. Rigid Formalities, Protocols, and Structure

Starting a corporation involves the complete dedication of time, energy, and patience, especially at its infant stage to avoid going against legal requirements.

There are many protocols and formalities associated with starting and maintaining a corporation like appointing the board of directors, adhering to the bylaws of the corporation, having annual meetings, keeping board minutes, and Creating an annual financial statement. 

5. Delay in Decision Making

Having a management team could also lead to a delay in decision-making, as people have their own different ideologies. Besides, no single individual owns a corporation, and even if you occupy a huge position like the Chief executive officer, it doesn’t mean your decision will always be accepted, you could as well be voted out from that position by the majority vote of the board.

How Long Does It Take to Become a Corporation?

The duration involved in starting and becoming a corporation depends solely on the state, country, or jurisdiction you want to operate in, though it involves similar processes.

If you’re in a hurry to start a Corporation, then it is very important to carry out thorough research on incorporation and note the major information that each jurisdiction will require on the Article of Association. Starting a corporation could take a day or weeks to complete all formalities.

How Much Does it Cost to Set Up a Corporation?

The cost involved in starting a corporation depends solely on the state or jurisdiction you want to build your business, it is important you have a clear understanding of the expenses you’re going to incur in starting a corporation.

Here Is a breakdown of the expenses you’re likely to expect:

  • Filing Article of Association
  • Attorney’s Fee
  • Charges for Various Government Filings
  • Franchise Tax Prepayment in the First Year

Filing Article of Association

The Article of Association which is also known as the certificate of incorporation is an official document you’ll get from the secretary of state, required for legally starting a corporation.

The filing fees varies depending on the state or jurisdiction, the charges may be set, based on the number of authorized shares or sum of both. The secretary of state normally charges a sum of $100_$250 and above.

Attorney’s Fee

It is not really necessary that you must employ an attorney before incorporating. With the internet, you can get any professional services you need, however, it is more advisable to work with a professional attorney to avoid mistakes that could lead to complications or lawsuits.

Attorneys collect a flat fee of $500-$900 or more for incorporation. The charges include providing assistance in completing the legal documents and working with shareholders.

Charges for Various Government Filings

Corporations are expected to pay fees ranging from $50-$200 for government filing, this filing depends on the kind of business you’re conducting and your chosen state. 

Franchise Tax Prepayment in the First Year

A franchise tax is a sum of money paid for the privileges of operating as a Corporation in a particular state. The fees vary from $800-$1000, though not all states collect this tax.

Does Every Business Need a Corporation?

Generally, there’s no law or written requirements that say that every business must be a corporation. As a matter of fact, there are other forms of business like the sole proprietorship and partnership, where you’re only required to register your business.

Deciding to incorporate depends totally on the vision you have for your business. Now, one major benefit of a corporation is the limited liability protection it gives its owners.

However, if you like the flexibility of making decisions on your own without any interference from external forces, then there’s no need to incorporate.

How to Start a Corporation

The following steps are involved in starting a corporation:

  • Select a business name
  • Find out if your chosen name is available
  • Register a DBA name
  • Elect a board of directors
  • File for an article of incorporation
  • Prepare a shareholders agreement document
  • Prepare your corporation’s by-laws
  • Organize the first board meeting
  • Issue stocks
  • Register with the IRS, State, and Local tax bodies
  • Get a business license and permit
  • Open a business account

1. Select a Business Name

Coming up with a business name is the first and most crucial step to take when starting a corporation.

You’ll need to add a corporate designation, a word that makes your business stand out as a corporation, it could be ‘Incorporated’ or Inc for short, ‘Limited’ or LTD and ‘Corporation’. Avoid using restricted names, these are names your state restricts you from using example, insurance. 

In order not to cause confusion, avoid using similar names with other entities, select a name that is easy to pronounce and that’ll make your business stand out, check out for domain names too, because having a great name without finding a suitable domain name can also pose as an obstacle.

2. Find out if Your Chosen Name is Available

After choosing a business name, it is very important to research that name. Find out if it is officially in use by another company in your jurisdiction. You can do this by going through the state’s office of Corporation and business to find out the availability of your chosen name. 

Business names can be registered when filing for an article of incorporation. 

3. Register a DBA name

DBA means ‘doing business as’. In most cases, you might want to run your business using a different name from the legal corporate name you’ve registered. If this is the case, then you might have to register a DBA name or trade name. 

The laws guiding DBAs differ between states, countries, and jurisdictions. Check with your state’s office of business development or corporation to get information about your location.

4. Elect The Board of Directors

The next step in starting your business is electing the board of directors to oversee the management of the corporation. The number of directors you’ll appoint depends solely on the state or jurisdiction’s laws and regulations your business will be located at.

5. File for an Article of Incorporation

You’ll have to meet up with your state’s Secretary of State to collect, complete, and file your article of incorporation document. 

The names of your directors are required on the article of incorporation in some states. You might also need to get a registered agent, this is a contact person listed on the file.

6. Prepare a Shareholders Agreement Document

Though not necessary, a shareholder’s agreement document is something you should have in case of dismissal, death, retirement, or any other issue that might warrant a shareholder to transfer ownership of his shares to the corporation. This assists in protecting the interest of the other owners if one dies, leaves, or retires.

Having a professional corporate attorney is Handy in preparing this document.

7. Prepare Your Corporation’s By-laws

By-laws are laws and regulations guiding the general operation of your business. Bylaws deal with things like the number of directors, authorized stocks to issue, procedures for holding meetings, and record keeping. 

Corporate by-laws are not required by the state, but you need them for a structured and efficient management of your business. Always seek help from a professional corporate attorney in preparing by-laws.

8. Organize the First Board Meeting

No matter the number of directors you have in your business, it is important to organize the first board meeting with your directors. 

This is done to handle issues relating to appointment of a structured management team, approval of by laws, and the authorization to issue stocks.

9. Issue Stocks

After appointing the board of directors and organizing the first meeting, where the directors authorized the issuance of stock, you can then proceed to issue stock certificates where necessary.

10. Register with the IRS, State and Local Tax Bodies

Corporations pay taxes on their profits, but before paying the tax, you’ll have to get a tax identification number from the IRS, state, and local tax bodies. You can also carry out more research on corporate taxation laws in your chosen State or jurisdiction to know what is required of you.

11. Get a Business License and Permit

You can not start running your business without getting a license or permit to do so. Requirements for getting a permit and license depend on the state or jurisdiction you’re operating in and the type of industry you’re in.

Carry out thorough research to find out the kind of license and permit your corporation needs in your chosen state.

12. Open a Business Account

A business account is required for structured and organized financial documentation. Shareholders’ or owners’ accounts are always separate from that of the corporation.

Find a reliable bank and know what kind of documents you need in opening a business account, some ask for a corporate resolution while others need a copy of your article of incorporation and other relevant documents.

Conclusion

Corporations come with a lot of advantages with fewer disadvantages, though starting a corporation involves a lot of time, money, and patience.

With corporations, shareholders’ personal properties and investments are protected in any event of winding up. They cannot be held liable, or sued by creditors.

I hope the information provided above covers everything you need to know about starting and managing a corporation.

References

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