Step 4: How to Form a Corporation

By Hanna Hasl-Kelchner, The No Nonsense Lawyer™

Incorporation requirements are a function of state law. As a result, they can vary. Always consult with the state where you plan to incorporate and get its specific requirements before moving forward with the incorporation process. That said, the general steps to setting up a corporation are the same for most states.

Below is a list of action steps for setting up a C corporation. The S corporations and limited liability companies (LLCs) have many of the same set-up requirements, except where noted.

1. Select a Business Name and Confirm its Availability  States require the word "corporation," "incorporated," "company," "limited," or an abbreviation thereof, to be included as part of your business name. The purpose of that requirement is to give notice to the rest of the world that your business is a separate legal entity that limits the owner's personal liability.

Choosing the right name is an important step in establishing your business identity. But before filing incorporation documents, you'll want to make sure the business name you picked is available. Most states let you check availability in advance, and for a small fee will reserve the name for a short period of time, usually 60 to 180 days.

2. Deciding Where to Incorporate  Most new businesses incorporate in the state where they are domiciled – their home state. Sometimes future business plans will merit filing in a particularly business friendly jurisdiction such as Delaware.

3. Articles of Incorporation  The articles of incorporation are a formal legal document filed with the state along with a filing fee. The articles of incorporation basically sets forth the who, what, when, where, and why of your business. It includes your business name, your business address, your registered agent, your business purpose, the duration of your business, and the names of its owners. For LLCs the document is known as articles of organization instead of incorporation.

The registered agent is the person you delegate to receive service of process if your business is ever sued. You can appoint yourself as the registered agent, or you can delegate that task to a third party who offers such services.

A process server arriving at your place of business may not necessarily be discreet when serving you with a formal legal complaint. Besides being unnerving, you may also not want customers or employees to be witness such an event. That's one reason companies use third parties as registered agents.

4. Assumed Name Certificate  You'll need to file an Assumed Name Certificate if the business name you're operating under is different from the corporate name. (Remember, the exact title of the document can vary from state to state.) The assumed name certificate allows someone searching the public record to connect the dots between the business name and the corporate entity behind it.

5. State and Federal Employer ID numbers and Chapter S Filing  You will need to obtain unique state and federal employer identification numbers. These numbers are used for payroll and tax purposes. The federal number can be applied for online with the Internal Revenue Service (IRS) in a matter of minutes. Most states have online application procedures for their state ID numbers too. Check with the Secretary of State Office in the jurisdiction where you are incorporating for more information.

6. Chapter S Filing  If you are electing to be an S corporation, you will need to file a Form 2553 with the IRS.

7. Doing Business Registrations  If you're doing business in a state other than your state of incorporation, your business is a "foreign corporation" and you may need to register to do business in that other state. Check with the Secretary of State Office to determine whether your intended business activities trigger their definition of "doing business."

8. Identify and Obtain Applicable Business Licenses and Permits  The type of business you are creating, where you plan to locate it, how you plan to run it, and who is qualified to work there may all trigger license or permit requirements.

9. Shareholder Agreements (S or C corporations) and Operating Agreements (LLCs)  The purpose of shareholder agreements is to address ownership and controls issues, especially the transferability of shares, buy-out rights, the delegation of decision-making authority for daily operations, and the distribution of profits. It's useful for small businesses where ownership is concentrated in the hands of a few. LLCs have members, not shareholders. Operating agreements serve the equivalent function for LLCs. Some states require LLCs to have operating agreements, others don't.

10. Corporate Formalities  Among the formalities required to maintain the corporate veil are annual shareholder meetings that memorialize major decisions in a written record called "minutes." The purpose of a shareholder meeting is to elect directors, appoint officers, adopt bylaws and resolutions (such as a resolution authorizing a company bank account), and to issue shares of stock, among other things.

When reviewing these ten steps its important to note that some of these steps can occur simultaneously while other must occur sequentially. The state where you plan to incorporate can provide you with more information. Check with the Secretary of State office. Other options include using a service to incorporate your business, such as LegalZoom.com, Incorporate.com, or Bizfilings.com, or hiring an experienced business lawyer to do it for you.