Creating a corporation has many benefits, like more credibility and protection from legal problems. When starting a business, it’s important to pick the right legal structure. Your options include being a sole proprietor, partnership, LLC, corporation, or cooperative. Many businesses choose to become a corporation because of these advantages. If you’re thinking about this option, here’s how to do it. A gives owners (called shareholders) limited liability protection and a clear management system, making it easier to transfer ownership. Big companies and investors often prefer this structure. You can set up a corporation by yourself, online, or with legal help. The initial costs will vary based on your business needs. A legally separates the company from its owners and shareholders.
In this blog post, we will discuss over the 5 key steps to becoming a corporation.
What is a corporation?
A corporation is a type of business that is separate from its owners in the eyes of the law. This means it has its own rights and responsibilities, like entering contracts, borrowing money, and paying taxes. One key benefit of a corporation is that its owners are not personally responsible for its debts.
When you start, it becomes a legal entity with its own assets and liabilities. This allows the business to operate independently from its owners. Small and large businesses can choose to become a corporation to benefit from this legal structure. Corporations can do things like buy and sell property, sue or be sued in court, and raise money by selling shares of ownership. This makes it easier to transfer ownership and raise funds compared to other business structures.
How to become a corporation
Starting a small business and turning it into a corporation involves several key steps. These steps may vary depending on the state where your business is located, so it’s crucial to understand the specific regulations for your area. Here are the general steps you can follow:
- Hire a transactional attorney: A lawyer can guide you through the process of forming your business as a corporation. Laws regarding corporate formation differ from state to state, and they can be complex. An attorney can help you navigate these laws and ensure that everything is done correctly to avoid any issues.
- Create corporate bylaws and appoint directors: Bylaws are internal rules that govern how the corporation operates. While not all states require bylaws, having them can clarify roles and responsibilities within the business structure.
- Issue stock: Stock represents ownership in the corporation and is given to shareholders who contribute to the business in various ways.
- File additional required documents with the secretary of state: Depending on your state, you may need to submit additional documents, such as annual reports or statements of information, to the secretary of state.
- File necessary IRS forms: You need to obtain an Employer Identification Number (EIN) for your corporation. This number is like a Social Security number for your business and is used for tax and banking purposes.
If hiring an attorney is not feasible for you, there are online options available for filing applications and forms. However, proceed with caution, as mistakes in this process can be costly. It’s important to be thorough and accurate when completing these steps to ensure the successful formation of your corporation.
What are the types of corporations?
There are different types of corporations like C corporation, S corporation, B corporation, closed corporation, and nonprofit corporation. Each type has its advantages, downsides, and rules to follow. C and S corporations are the most popular ones.
Here are 5 basic facts about each type of corporation:
1. C corporation:
A C corporation is a type of business where profits are taxed separately from the owners’ personal earnings. When you set up a C corporation, your business gets legal protection. This means that if your business gets sued or goes bankrupt, your personal belongings are safe from being taken away. The same goes for your co-owners. A C corporation can have many owners, also called shareholders.
For a C corporation, you need to have a board of directors and a registered agent to handle any legal issues. The board makes important decisions for the company, like hiring managers and officers, and holds meetings with shareholders and directors at least once a year. It’s important to keep records of these meetings.
2. S corporation:
An S corporation is a type of corporation where the profits are passed on to the shareholders and taxed as personal income. This helps you and your co-owners avoid being taxed twice, once on your business earnings and then on your personal earnings. To qualify as an S corporation, your business must have between one and 100 shareholders and must file taxes as a U.S. corporation. Additionally, you and your co-owners must pay yourselves reasonable salaries from the company’s profits.
3. B corporation:
If your business applies for and receives B Corporation certification, it means your company meets high standards for social and environmental responsibility. These standards include performance, accountability, and transparency. The nonprofit B Lab gives this designation to meet consumer demands for inclusivity and sustainability.
A B Corporation is not a tax structure at the IRS or state level. It won’t affect your taxes, bylaws, meetings, or number of shareholders. It’s more about your company’s reputation than its legal status. Your business can still be structured as an S corporation, C corporation, partnership, LLC, or sole proprietorship.
4. Closed corporation:
Many businesses decide to become C corporations because they are allowed to have an unlimited number of shareholders and sell stocks, making them public corporations. On the other hand, closed corporations are private companies that are also corporations but have a limited number of shareholders, usually around 35.
Choosing a closed corporation structure can be beneficial if you are running a partnership and want the legal protections of without needing to make significant changes to your business. Additionally, opting for a closed can help you avoid mandatory shareholder meetings and reporting requirements.
5. Nonprofit corporation:
A nonprofit organization is a type of company that helps the public or works for a specific cause. Nonprofits look like regular businesses, but they use their profits differently. If your company is a nonprofit, you have to use any money you make to support your causes, pay your employees, or cover expenses.
Nonprofits don’t have to pay taxes. Some common types of nonprofits include public charities and foundations (501(c)(3) organizations), social or political nonprofits (501(c)(4) organizations), and trade or professional organizations. You can donate to public charities, but social or political nonprofits focus on issues like advocacy.
Corporations vs. LLCs vs. sole proprietorships vs. partnerships
If you’re thinking about starting a business and wondering about the differences between corporations, LLCs, sole proprietorships, and partnerships, you’re not alone. Here are some common questions answered about these different types of business structures.
What are the differences between sole proprietorships, partnerships, LLCs, and corporations?
Deciding on the right legal structure for your business is a crucial step when getting started. There are various types to choose from, each with its pros and cons. In this article, we will discuss the benefits and drawbacks of the four main types of business organizations: sole proprietorships, partnerships, limited liability companies, and corporations.
Sole Proprietorship:
A sole proprietorship is a common type of business where one person owns and manages the company. In this setup, the owner is fully responsible for the business’s debts and has total control over how it is operated.
Partnership:
Partnerships are similar to sole proprietorships, but they have more than one owner. In a business partnership, an agreement is usually made to outline each person’s roles and duties.ful.
Limited Liability Company (LLC):
An LLC, which stands for Limited Liability Company, is a unique type of business that brings together the advantages of a partnership . It provides tax benefits and allows for flexibility in how it runs. In an LLC, the owners, known as members, are shielded from being personally liable for the company’s debts and responsibilities.
Corporation:
In the eyes of the law, a company is seen as a separate entity from its owners. A corporation can have as many shareholders as it wants. Shareholders choose a board of directors to run the company’s daily activities.
What is the safest form of business entity?
Different ways of legally structuring a business have both good and bad points. What works for one company may not work for another. Small businesses often like sole proprietorships because they are cheap to start and easy to run. However, bigger corporations might go for C-corporations because they give more protection against liability.
What is the best business entity for tax purposes?
The structure of a business, including its size, operations, ownership, and objectives, can impact how it should be organized for tax purposes. As a small business owner looking for simplicity and cost-effectiveness, being a sole proprietor may be the most suitable choice. However, as your business expands and becomes more profitable, transitioning to an LLC or an S corporation could provide benefits such as tax advantages and liability protection. These options allow for taxes to be passed through to the owners and shield them from being personally liable for the company’s debts.
Corporation FAQs
Who are the members of a corporation?
Shareholders are individuals who own shares of a company. When someone owns stock in a corporation, they are considered a shareholder. Shareholders have the authority to vote on significant matters, such as major business transactions and electing the board of directors. The board of directors is a group that manages the company and makes crucial decisions. They supervise the management team and establish essential company policies. The management team, which includes the CEO, CFO, and COO, is in charge of executing the board’s directives and overseeing day-to-day operations.
What are the advantages of becoming a corporation?
Choosing to turn my business into a corporation was a big decision that I thought about carefully. I think there are a lot of benefits to becoming a corporation. The most important advantage is that my personal assets are protected from business debts and legal problems because I operate as a limited liability company. Turning my company into a corporation has also improved my reputation and made me look more professional, which has helped me land bigger and more profitable deals with clients.
What are the disadvantages of becoming a corporation?
When I started my company, I never thought it would become so successful that I would think about investing in it. At the beginning, I was thrilled to turn it into a corporation because it allowed me to work on larger projects and expand further. But there were challenges too, like more paperwork and regulations. As a sole proprietor, I was used to handling everything independently. However, I had to comply with new laws and rules.
How long does it take to become a corporation?
When starting a company, forming a corporation can take different amounts of time depending on the state and the complexity of the business. It can range from a few weeks to a few months. You will need to submit articles of incorporation to the state, pay a fee, and obtain any required licenses or permits. It’s also recommended to seek legal advice to ensure everything is done correctly.
How much does it cost to set up a corporation?
Setting up a corporation can have different costs depending on your location and requirements. The first step involves filing paperwork, which may range from $50 to over $500, depending on the state you are in. Additionally, legal fees can vary from a few hundred to a few thousand dollars, depending on the complexityand the lawyer you hire.
Does every business need to incorporate?
When I had a small business, I had to make a big decision about becoming a corporation. Many people think that becoming a corporation is the next step for any company, but there are some important factors to consider. While being can protect you from personal liability and make it easier to get funding, it also means you have to follow more rules and spend more money.
Conclusion
In conclusion, transforming your business into a corporation can offer numerous benefits such as limited liability, access to capital, and potential tax advantages. However, it is essential to carefully consider the legal requirements and implications before making this decision. Seeking guidance from legal and financial professionals can help ensure a smooth transition and maximize the advantages of becoming a corporation.