USA: Establishing a Corporation
If you’re thinking of establishing a corporation in the United States, there are important factors you’ll need to take under close consideration. Read on for a rundown.
If after checking out our previous articles on starting up in the United States, you don’t think that a sole proprietorship, partnership, or even LLC are right for your venture, you may still be curious about how to establish a corporation in the United States. Here, we’ll run down the basics of starting your corporation and getting underway with your new business venture. Be sure to keep in mind that no matter what business structure you’ll be using, the key to any successful enterprise is a strong business plan — be sure to download our free business plan templates to help you along, and be sure to check out our rundown of common business structures if you’re looking into how to launch your company !
Like a LLC, a corporation is a legal entity in and of itself, and can be held accountable for litigation and bankruptcy, while in the vast majority of cases, its members are individually shielded from personal liability. Unlike a LLC, C-Corporations pay federal corporate taxes, and have more obligations placed upon its functioning. S-Corporations act as hybrid structures combining aspects of LLCs and C-Corporations. Keep in mind that all corporations are obligated to hold annual meetings and file annual reports, and are taxed differently than pass-through entities such as partnerships or certain LLCs.
S-Corporations and C-Corporations
S-Corporations and C-Corporations, sometimes called S-Corps and C-Corps, are very similar in most regards, besides taxation. C-Corps pay federal corporate taxes on the business’ earnings — that is to say, the corporation itself is taxed. Owners must still pay income tax, but their tax burdens can be lighter when the corporation is taxed on income rather than the individual. S-Corps do not pay federal corporate taxes and instead act more like smaller, pass-through business structures, where owners pay heavier individual income tax for the company’s earnings and the company itself is not taxed. Profits and losses are all passed through to owners. However, S-Corps are not allowed to have more than 100 shareholders, and owners must all be US residents.
As with any other business structure, you’ll need to select a name for your business and ensure that it doesn’t infringe upon other copyrights or include terminology considered problematic. Check here for to run a trademark check on your potential company name.
As with an LLC, you’ll also need to name a registered agent. This can be yourself, another owner, or even a company, but it will be the individual or entity that is served with all important government papers or subpoenaed in the event of litigation involving your company. The registered agent is required to have a physical address and presence in the state of the corporation’s registration, and should be available during normal business hours for the reception of documents on behalf of the corporation.
Then you’ll register with the IRS for your EIN, or Employer Identification Number, which can be done quickly and for free on the IRS website. You’ll need this number to open a bank account for your corporation. You should also consider opening a merchant account with your bank if you believe that your business will be accepting credit as a method of payment for your customers. In order to do this, your business will need a valid physical address as well.
Articles of Incorporation
Then you’ll need to file your articles of incorporation, in most areas with your state’s Secretary of State office (Arizona and Maryland are exceptions to this), you can find a state-by-state directory here. In order to file this paperwork, most states will wish to know your corporation’s :
- place of business
- address of registered agent
- statement of purpose
- shares and stock classes
- owners’ information
- incorporator’s signatures
Fees for filing articles of incorporation vary widely between states, so be sure to check into this with your Secretary of State before taking the plunge. Find a helpful directory of Secretary of State offices here.
Board of Directors
Every corporation has a board of directors, or a group (usually of owners and shareholders) who are responsible for making “resolutions,” or decisions, for the corporation’s conduct. The Board of Directors will draft the Corporate Bylaws together and will be an essential part of the corporation’s functioning. However, do keep in mind that drafting Corporate Bylaws is a task that absolutely merits the help of a skilled attorney.
Corporate Bylaws are established by the board of directors when the corporation is founded, and can be understood as a contract elucidating a corporation’s terms of functioning. Corporations are not obligated to submit their corporate bylaws to their Secretary of State office, but we do recommend, as in any business partnership, sitting down and combing through the particulars of this contract together. Corporate bylaws, much like an LLC’s Operating Agreement, lay out a corporation’s
- basic information (name, address, owners)
- board of directors’ basic information and contributions
- corporate mission
- where applicable, information about stockholders, voting shares, and the stock classes authorized to the corporation
- annual meeting schedule
- shareholder meeting schedule
- board meeting schedule
- record-keeping procedures
- procedure for changing corporate bylaws
- procedure for replacing or relieving board members
- definition of the corporation’s fiscal year
Corporations must hold annual board meetings, shareholder meetings, and more. Your state’s Small Business Administration office can help outline all of the requirements in your state. At corporate meetings, minutes must be taken — this means that there must be a running record of the meeting’s time, topics discussed, and decisions made. This is important for several reasons: first of all, so that absent parties can get the information afterwards, but also to increase the corporation’s transparency, as well as to ensure the IRS that the corporation is, indeed, an entity sufficiently separate from its owners to merit special tax status.
Unlike certain LLCs and other business structures, C-Corporations are legally and financially supposed to be separate from their members and owners, where S-Corporations act more like certain LLCs or partnerships in that they do not tax the business but rather the owners on their personal income from the corporation. For C-Corps, therefore, taxes placed upon the corporation mean that members and owners pay less tax on their personal earnings from the company. Corporations file corporate tax returns and complete Form 1120 (C-Corporations) and Form 1120S (S-Corporations) with the IRS, and corporations are to pay taxes on a quarterly basis in April, June, September, and January. If you’d like to file as an S-Corporation, you should keep in mind that you have 75 days in which to register as such with the IRS after the formation of your company. You’ll also need to register with your state tax office, a directory for which can be found here.
As you can see, each business structure available to new businesses in the United States come with unique advantages as well as challenges. Depending upon your financial situation, the goods and/or services you plan to propose with your business, your location, and more, there will be a structure that is more or less well-suited to you and your company’s needs. Don’t forget to check out our other articles on starting up in the United States if you’d like more information on this complex but rewarding subject.