Starting a corporation is one of the biggest commitments you can make.
As rewarding as it is, it’s also a potential source of stress in terms of maintaining profitability for your shareholders and employees. Thus, the importance of starting your corporation correctly and compliant with state and federal laws cannot be stressed enough.
In this blog, we talk about how to do that step-by-step.
What is a Corporation?
A corporation is a large organization that exists as a distinct legal entity from its owners. It is entitled to own assets, be taxed, borrow money, and be liable for lawsuits.
It is deemed as the most advantageous way to own a business given its many privileges.
Corporation vs. Company
Corporations and companies mainly differ in size, with corporations overtaking companies by a wide margin. It is more structured and complex as it requires separate recognition from the state and tax registrars.
Typically, the owners of corporations aren’t as involved in day-to-day operations but instead serve as shareholders. Meanwhile, companies rely heavily on the direction of their owners who are mere members of the organization.
Types of Corporations
Corporations are categorized according to the extent of their legal liability, tax reductions, and trading regulations. The different types of corporations are:
- C Corporation — considered as a separate legal entity by the state, therefore taxed separately. This type of corporation provides owners with the strongest protection against personal liabilities.
- S Corporation — gives the advantage of preventing double taxation, but is limited to having only 100 shareholders or less.
- B Corporation — similar to C corps, but emphasizes making a good social impact in addition to revenue. Required to present annual benefit reports of their contributions to the community.
- Closed corporation — a less formal and far smaller corporation barred from public trading.
- Nonprofit corporation — organized for charity, scientific tracks, religious entities, and other benefits. Due to their purpose of promoting public welfare, they are usually exempt from taxes.
Recommended Reading — An Introduction to the 4 Common Business Structures
Recommended Reading — A Guide to Setting up a Business in the US as a Non-Resident
How to Start a Corporation: A Step-by-Step Guide
- Evaluate your Business Standing
- Address Finances
- Do Market Research
- Lay Down your Business Plan
- Select a Corporation Type
- Decide on a Management Framework
- Appoint Directors and Officers
- Name your Corporation
- Register a DBA Name
- Decide where to Set up Headquarters
- Secure a Certificate of Incorporation
- Write Corporate Bylaws and a Shareholder’s Agreement
- Issue Stock
- Register with the IRS, the State, and Local Tax Agencies
- Open a Corporate Bank Account
1. Evaluate your Business Standing
Before diving into a big decision, you need to evaluate yourself honestly. Starting and managing a corporation is leagues apart from running a small business. It’s a major investment and a huge responsibility that could mean either reaping great results or going into debt.
You’ll see a lot of slogans saying it’s all about having the right mindset and being bold enough to take risks. There’s no doubt those two things are needed when trying to make a mark, but it’s better to be brave and prepared.
Review your idea — your products and services — and get feedback from the right people. Build on criticisms to improve what you have to offer. More importantly, assess your financial stability.
Mental preparation is only part of your tasks before takeoff. You also need to have enough resources to take your first steps.
2. Address Finances
Money is never an easy subject so it has to be addressed early on, especially when it comes to business. Starting a corporation involves a lot of paperwork and securing various permits and licenses. All these cost money.
Depending on the requirements of your local government and the nature of your business, the range varies. But in general, filing necessary documents alone cost $100 to $800.
This doesn’t take into account other requirements plus the resources you need to kickstart your business operations and keep it running.
If you already have a dedicated budget for your business venture, great. But if you have a narrow profit margin and don’t have a lot to spare, there’s no shame in putting your plan on hold.
Of course, if you’re persistent, there are options you can look into. Availing a loan is one way to get money fast. Just make sure you have your numbers in check so you can pay it back without any problems.
There’s also asking help from relatives and close friends, or going on a crowdfunding website. Whatever you choose, the important thing is the money is going somewhere it will grow.
3. Do Market Research
Today’s market is saturated with so many businesses. Almost every niche is filled with hopeful business owners trying to make it big. While it’s an exciting time, it’s also a difficult one for those who aim to stand out and be at the forefront of their industry.
Market research will help you get a feel of what you’re getting yourself into and how you can maximize returns. See what’s currently on the market and then revisit your brand and its offerings.
Chances are, many companies sell similar items or provide competing services. That is why your goal is to put forward value-adding goods for your target audience.
The results of your research shouldn’t just guide your decisions on what to offer, but also how you plan to deliver them.
How can you make life easier for your consumers?
If you answer that question with just your product or service, you need to do a little more growth hacking scheme. These days, it isn’t enough to have a great lineup of products, it’s also about giving your customers a pleasant and memorable experience.
4. Lay Down your Business Plan
Now it’s time to grind on the intricate details of your corporation.
A business plan is essentially a blueprint of how to manage the entire enterprise. It involves laying out your products or services, detailing the market you’re serving and the strategies you have to penetrate it, and the day-to-day functions of your staff.
In short, you need to prepare an executive summary, market evaluation, and operational plan. These will keep you on the right track on the day of your launch and years later when you’re already expanding.
Don’t forget to include marketing strategies to get the word out and keep you top-of-mind for decades to come. It would be excellent if you can get yourself oriented with analytics tools you’ll need to facilitate for your marketing campaign.
Your business plan also serves as a good indicator of your corporation’s health. If you’re not hitting your targets, go back to the drawing board and adjust your strategies accordingly.
Additionally, check to see if your goals are realistic. While a good challenge is a great motivator, unreasonable expectations lead to unnecessary stress and burnout. Find the right balance between aiming high and accepting that some things are beyond your control. You can always work towards higher standards later.
5. Select a Corporation Type
Earlier on, we discussed the different types of corporations and their respective pros and cons. After having fleshed out your business plan, it’s time to decide which type of corporation to assume.
Although it seems like a trivial task, the type of corporation you choose bears a lot of weight on your tax proceedings and overall organization. It all boils down to what you’re trying to achieve and how you see yourself doing it.
Are you more hands-on or can you do without regular meetings with board members? What are your terms on ownership, shares, and liability? Be critical in weighing in these factors as they’re the main pillars of your corporation.
6. Decide on a Management Framework
Many companies and corporations are diverging from traditional management frameworks that follow a vertical chain of command. Instead, some employ more horizontal forms of management that allow the free exchange of ideas and feedback.
The three basic types of organizational structures are as follows:
- Functional Organization.
- Projectized Organization.
- Matrix Organization.
A functional organization is the most common type of structure. This is when employees are grouped into different departments based on their areas of specialization. For example, marketing, human resources, information technology, sales, and others.
In this type of organization, team members are expected to perform project work and departmental work simultaneously. Concerns and progress reports are channeled through a hierarchical system.
A projectized organization is where employees with different fields of expertise are grouped to accomplish a specific project. Budget allocation for this kind of framework is not tied to a single department, but rather to the needs of specific tasks. Once a project is done, its budget can be reallocated to other activities.
Matrix organization is a framework that merges the benefits of the first two organizational structures. Team members report to both project managers and functional managers. This way, communication is facilitated more efficiently and ideas are aired with ease.
While some corporations found success in less traditional frameworks, it’s not to say you should do the same. Again, it’s a matter of recalling your targets and going with the best method that fits your needs. This way, you build a sales pipeline that’s tailored to your corporation and its target audience.
7. Appoint Directors and Officers
Perhaps one of the most crucial steps to succeed in anything is surrounding yourself with the right people. In this case, a lot is riding on who becomes your directors and officers.
Corporate directors are essentially overseers of business affairs. They are responsible for strategic management. On the other hand, corporate officers handle day-to-day operations. Both of these positions must be filled by competent and loyal leaders.
A minimum number of directors are required in some states depending on the number of owners of the corporation. The exact number is dependent on state-specific regulations.
8. Name your Corporation
Your corporation’s name is one of the first things the public will encounter. A good rule of thumb is making your corporate name striking and memorable. Have it describe who you are and what you do at a glance.
In many states, the names of corporations are bound to strict guidelines. The most common of which is using a corporate designation like “Incorporated,” “Limited,” “Corporation,” or the abbreviation of these identifiers.
Some regulations involve word restrictions. For example, corporations are not allowed to use the words “Bank” and “Insurance” in their names.
Research on the list of restricted words in your state as well as potential trademark infringements and similar business names already in use. Once everything checks out, head to your state’s corporation’s office to reserve the name you’ve chosen before filing your articles of incorporation.
9. Register a DBA Name
For one reason or another, you may want to have a different name for your company to go by in its operations from the one that appears on legal documents.
The main advantage of filing for a fictitious business name or “doing business as” name is providing you privacy. Some owners may not want their names displayed to the public, especially when the corporation begins to gain traction.
A DBA is also helpful in boosting brand awareness. Oftentimes, a corporation’s name won’t slide off the tongue easily. With a DBA, you have the flexibility to come up with something more catchy while preserving rights to the business.
By the time you firmly establish your brand, DBA names give you the freedom to expand into other markets. Simply register DBAs for your new ventures and keep your original corporation as a base for your satellite businesses.
10. Decide where to Set up Headquarters
As you saw in previous items, the laws of your home state determine the limitations of your business. Many business owners opt to incorporate in states that have friendly laws on regulations and taxes. Among the most notable states are Delaware and Nevada.
Of course, it’s not easy to incorporate outside your headquarters if you’re already running a pre-registered business. For this step, it’s best to seek legal advice and the help of financial advisors.
11. Secure a Certificate of Incorporation
At this point, you’ll be dealing with the nitty-gritty of forming your corporation. Your first order of business is securing a certificate of incorporation. Visit the government website of the state where you wish to incorporate to get details about the process. In case you don’t know the government website in your state, you may opt to use a Whois lookup tool to acquire it.
Drafting and filing your articles of incorporation is formal paperwork that documents the making of your corporation. You’ll be asked to fill out forms either in person or online that ask for pertinent information like your firm’s name, address, and nature of business.
The latter half of this process is accomplished with a registered corporate agent. Pay the processing fee, and wait for your request to be processed. Make sure you provide the right details in all your forms to avoid inconveniences in the future.
12. Write Corporate Bylaws and a Shareholder’s Agreement
Corporate bylaws are internal rules and regulations that govern how a corporation is run. It is usually a single document that specifies corporate standards and guidelines for business operations that are upheld throughout the organization’s lifetime.
Although not all states require you to make corporate bylaws, it’s always better to have one. This document formally indicates the rights and responsibilities of all parties in the corporation. Furthermore, banks use them as a marker for the legitimacy of your organization in case you decide to make a loan.
Some of the pertinent information in corporate bylaws include:
- Duties and responsibilities of the board of directors.
- Term limit of board members.
- The minimum number of board members present to meet the quorum.
- Rules in replacing a board member or corporate officer.
- The corporation’s purpose.
- The management structure.
- Basic corporate information (e.g., address, registered name, etc.).
- Frequency of board meetings.
- Guidelines for approving contracts and loans.
There’s a need to be more detailed when drafting a shareholder’s agreement as it involves ownership and finance. You must be as specific as possible, addressing any loopholes that could spell disaster in times of trouble.
State how one becomes a shareholder and how shares are transferred from one party to another. Indicate the initial values of shares, establish voting rights, and flesh out what steps to take in case an owner departs or retires.
Be clear in stating how dividends and distributions work, as well as what methods are used to evaluate shares over time.
Before making these documents official, get in touch with a legal professional to review each item thoroughly.
13. Issue Stock
Issuing stock is required by both state and federal security laws. There are two main types of stock: common and preferred stock.
The former grants part ownership of the organization, dividends, and voting rights that usually correspond to one vote per share. This type of stock is a high risk, high reward type of investment where returns are variable depending on the performance of the corporation.
Meanwhile, preferred stock ensures a fixed dividend but does not come with voting rights. In the long run, and especially if the corporation does well, common stock yields better returns.
A corporation is bound to its own bylaws with regards to issuing shares. This means you can issue as many authorized shares as needed or put a limit to them as you see fit.
To issue stock, you first calculate the total capital needed. Then you review how many authorized shares are available and evaluate the total value of stocks to be released. For every stock you issue, you must determine whether it be a preferred or common share.
Upon issuance, notify the Registrar of Companies within 10 business days to complete the transaction.
14. Register with the IRS, the State, and Local Tax Agencies
If you’re going to operate a C corporation, remember that it’s considered a separate taxpaying entity. As such, you need to get additional tax ID numbers from the IRS plus other local tax agencies.
Simply fill out the forms on the IRS website and double-check your compliance to prevent legal liabilities.
Note that a corporation does not get tax deductions for distributing dividends to shareholders.
15. Open a Corporate Bank Account
Finally, open a bank account that’s dedicated specifically to the corporation. For this, you’d likely need a corporate resolution together with your articles of incorporation. Limit access to a select few and keep everything transparent between board members to avoid conflict.
In 2021, the world is adjusting to the lasting results of the COVID-19 pandemic. Some parts of the globe may not even be done dealing with the spread of the virus.
While many of the basic requirements for starting a corporation are the same, it’s good to keep in mind that we live in unprecedented times so we must manage our expectations.
The kind of growth you would expect pre-pandemic might not be achievable in these peculiar situations. But if you start with a good foundation, you can weather the storm and make it out as one of the organizations that successfully held its ground.