How to Incorporate a Business

Setting up a corporation protects you from some liability as a business owner, preventing your personal assets from being at risk. It also allows you to raise money from outside investors and eventually take the company public.

But incorporating can also be a daunting process that subjects your business to additional ongoing requirements. If you’re considering starting a corporation, we’ll walk you through the steps of how to incorporate a business and what to know before starting.

What is incorporation?

Incorporation is the act of forming a legal corporate entity. Corporations are required to file articles of incorporation with the secretary of state and may also need to register with local agencies.

If you already operate a business as a different entity, like an LLC, partnership or sole proprietorship, you may have a few options for converting the entity to a corporation. However, changing from an LLC to a corporation could result in additional taxes, depending on your existing assets and liabilities.

Types of corporations

When incorporating your business, you can choose from several types of corporations, depending on your goals for the company.

C corporation

A C corporation, or C-corp, is an individual entity independent of the business owners. An unlimited number of shareholders can own a C-corp. C-corps can also go public and raise capital through stock sales. Owners receive the strongest liability protection of any structure and are not personally responsible for the company’s debts.

C-corps must pay corporate income taxes at the current federal tax rate of 21%. C-corps are subject to double taxation since owners also have to pay taxes on dividends on their personal returns. But C-corps can also deduct certain employee benefits as business expenses.

S corporation

An S corporation, or S-corp, is considered a pass-through entity. Rather than being taxed at the federal corporate tax rate, income is passed through to shareholders and taxed as individual income. Federal tax law allows owners of pass-through businesses to deduct up to 20% of qualified business income.

B corporation

A benefit corporation, or a B-corp, is a mission-driven for-profit corporation. B-corps must pay corporate taxes and may be required to submit annual reports showing community contributions. Besides having ownership of the company, B-corp shareholders are responsible for making sure the corporation remains profitable and contributes to the public good.

How to incorporate a business in 7 steps

Corporations are subject to more rules and regulations than simpler business entities like sole proprietorships. It’s a good idea to hire a business attorney to help you navigate the process. The basic steps are:

1. Research your business name

Before settling on a name for your corporation, check your state’s corporation database to find out if your desired business name is already taken. You should also check the official trademark database within the U.S. Patent and Trademark Office to avoid a costly trademark infringement lawsuit.

Next, research your competitors, area and successful businesses. Market research can help you choose a name that is memorable and consistent with your brand. You may want to consider available domain names for your company website as well.

You may want to trademark your own business name to prevent other businesses in your industry from using it. You could obtain trademark protection for the name of your products or services as well.

2. Find out where you need to register the business

Most corporations need to register with state agencies in each state where they conduct business. That includes any state where your business has a physical presence, where your employees work, where you often have in-person meetings with clients or where a significant portion of your revenue originates.

You may be required to register with the secretary of state’s office, a local business bureau or business agency. You can use this tool from the Small Business Administration (SBA) to look up state-specific requirements.

Many businesses are also required to report within 90 days of registration information to the federal government about the individuals who own and control the company. You can file online free of charge.

You may also need to file for licenses and permits from your city or county office, depending on your type of business. Local governments determine registration, licensing and permitting requirements. Check your local government websites for more details.

3. Choose a location to incorporate

If your business operates in just one state, you should incorporate in that state, as out-of-state formation can lead to unnecessary taxation. You’ll need to choose an appropriate address, but it doesn’t necessarily need to be a commercial office.

If you operate in multiple states, you can choose to incorporate in whichever state is friendliest to corporations. Consider factors like the state’s business tax climate when choosing where to incorporate. The Tax Foundation’s State Business Tax Climate Index may help you decide.

Every state levies property tax and employment insurance tax, but some states exclude other taxes that impact businesses, such as corporate income tax, sales tax and personal income tax. If you have the freedom to choose where to incorporate, keep state taxes in mind.

The state’s legal climate should also be considered when making your selection. For instance, Delaware has long been known to have corporation-friendly business laws and efficient legal processes for corporate cases, making it the top state for business formation.

4. Name a registered agent

Corporations are required to designate a registered agent in all states where the business operates. The person you choose must have a physical address in the state of registration. If your company operates in multiple states, you’ll need multiple registered agents. You’ll need to designate a registered agent at the time you form your corporation, but you can change your registered agent later.

The registered agent is responsible for receiving official documents, such as legal notifications, on behalf of your business. You could act as the registered agent, or you could appoint someone else within the company or a third party. Naming a registered agent would allow you to protect your privacy as the business owner.

5. File your articles of incorporation

All states require corporations of all kinds to file an articles of corporation form, also known as a certificate of incorporation. The articles of incorporation are a single document that calls for general information about your business, such as:

• The name of your corporation
• Business address
• Business purpose
• Registered agent
• Directors and officers
• Number of shares that the corporation will issue
• Value of shares

You would submit your articles of incorporation to your state’s secretary of state office in person or by email, mail or fax. The fee for filing articles of incorporation typically ranges from $50 to $300.

6. Write your corporate bylaws

Bylaws are the governing documents for your corporation. Though they are for internal use only, some states mandate that corporations have bylaws. Even if they’re not required, you should still have bylaws in place to keep your corporation running smoothly.

Your corporation’s bylaws may outline the responsibilities of officers and shareholders, prescribe processes for making business decisions, describe the frequency of meetings or otherwise provide standards for business operations.

While you have flexibility, your bylaws can’t interfere with the authority of your board of directors or business laws in your state, and the guidelines should be feasible for your business. You can find free templates online or hire a business attorney to help you draft your bylaws.

7. Establish a board of directors

All states require corporations to set up a board of directors. The number of directors required depends on your state and your corporate structure. These directors will provide guidance to your corporation and approve major business decisions, so it’s best to choose a team of experts that will help your company flourish.

Consider factors like industry experience, unique skills and diversity when choosing directors. You can find candidates by sharing the opportunity with your professional network, creating a listing on a board recruitment site, or getting help from a board recruitment service.

Shareholders elect board members, which may include both company executives and non-employees. Public companies are also required to appoint a majority of independent directors who don’t have material ties to the corporation.

The board of directors needs to meet at least once a year, but your bylaws may dictate more frequent meetings. Many states allow virtual meetings. Corporate minutes should document the events that transpired and the topics discussed to ensure legal compliance.

Staying on track with your newly formed corporation

Corporations face strict scrutiny, and it’s imperative that you follow all guidelines and regulations to maintain the validity of the corporation. After incorporating your business, be sure to keep up with ongoing obligations, such as:

Annual reporting requirements

After the business is incorporated, you need to distribute an annual report to shareholders. The report should include a statement from the CEO, financial data, results of operations, market segment information, plans for new products and research and development on new company activities, among other things. The annual report is intended to provide shareholders with an overview of the company’s current state.

Public companies are also required to file Form 10-K, a more detailed annual report that includes financial statements, with the U.S. Securities and Exchange Commission (SEC). In some states, corporations must also file a brief annual registration report with the secretary of state.

Taxes

The IRS may require your corporation to pay estimated income taxes throughout the year and file an annual income tax return.

In addition, corporations must pay federal employment taxes, such as social security, Medicare, and federal unemployment tax. Some corporations must also pay excise taxes. More than 40 states also levy corporate income taxes, which should be a factor when deciding where to incorporate the business.