Learn How to form a corporation in the USA. State by State

Basic Steps of Starting Your Corporation

One of the main advantages of being a US citizen (or immigrating to the US) is that you have a great opportunity of starting your own business. That’s why there are about 31.7 million small businesses in the US.

It’s one thing to succeed as an employee, even as a highly paid specialist worker. It’s another thing entirely to succeed with your own business. Plenty of people dream about starting a company that would become as successful as Google, Facebook, or even the newer ones like Airbnb, Spotify, and Uber.

Why Incorporate?

There are several possible reasons why you would want to form your corporation. For many, the main reason is to protect personal assets from business liabilities. That means you won’t have to risk your bank account (or your own house) to cover any debts or damages that your business might incur in the future.

With a corporation, you can make sure you have a unique brand, and you protect your brand from competitors. You’re better able to reassure customers and clients that you’re running a legitimate business, and you’re also better able to acquire capital. You can build and bolster your brand identity that’s separate from your own personal identity.

Once you’ve incorporated, the business will be its own identity and it can just about last forever. You can create long-term plans, and it can remain operation without having to reestablish itself every now and then. And you can also transfer the ownership more easily, either by selling the business or having your children inherit the business in the future.

Step 0. Create Your Business Plan (Optional)

This is the very first step to starting a business. You need to do this, at the very least to make sure that you’re serious. That way, you clarify your plan and you have definitive goals and solutions to offer.

A typical business plan will include:

Executive summary. This is a summary of the entire business and your plans. You need to describe the problem you’re solving, and also what products or services you’re offering as solutions to that problem. It should also contain information about your financials as well as your funding requirements.
Products and services. This is a more detailed look at all the solutions you’re offering. Here, you outline your competition, and describe their efforts. You will need to highlight your competitive advantages over your rivals. At this point, you should also note any patents or specific intellectual properties. You should also review your metrics and milestones, referring to what steps you need to take to get your services and products ready to sell.
Market analysis. This is information regarding your target customers. If you have specific information regarding your potential customers, then you’re better able to craft an effective marketing and sales plan. You should also have info regarding the growth of your market and of the industry itself. That way, you can also explain how your corporation will adapt to any expected changes in the industry.
Marketing and sales. In this part of the business plan, you lay out how you plan or reaching your target market segments. Explain how you plan on selling to these target markets, lay out your pricing plan details, and also mention any type of activities and partnerships that you need to do to succeed.
Company organization and management team. This part of the business plan is about your current team, along with who else you may need to hire in order for your corporation to succeed and grow. Note down your corporate history, location, and legal structure, and include brief bios and relevant experiences of each of your current members. The point here is to prove that your current team can make your business succeed, or they’re the nucleus for a larger team in the future.
Financial projections. You may want to include forecasts for monthly sales and revenues over the next year, and for the next 3 to 5 years. You’ll want to prepare a profit and loss statement, a cash flow statement, and a balance sheet with the assets, liabilities, and equity in your corporation.

Step 1: Name Your Corporation

Different states have different legal requirements regarding what name you can use for your corporation. But there are 2 general requirements that are the same for each state.

Unique Name

The first requirement is that your corporation’s name has to be unique. You can’t just call your corporation by a famous brand so you can ride on that brand’s popularity and reputation. The name of your corporation has to be distinct.

This actually protects you as well. When you have established a good reputation for your business, then other businesses can’t use your corporation name for themselves so they can ride on your corporate reputation.

Regardless of which state you’re based in, your state’s Secretary of State website should have a running database online where you can search the business names that are already in use. That way, you can doublecheck the corporation name you’re considering to make sure it’s not too identical to other brand names that are already in use.

You may also want to check and see that your corporation name isn’t in use in any other state in the country. You’ll want to have a unique name to avoid any confusion, especially when you’re dealing with online business.

Try to get a name that’s memorable, easy to pronounce, and easy to spell. That way, potential customers and clients will be able to recall your brand name more easily. They will also have an easier time recommending your brand name, with your products and services, to their friends and family.

If you can’t find a good brand name for your corporation that should go well with potential customers, you can find and sue business name generators online. These may give you some more ideas.

Other Legal Requirements

Many states also have corporation naming rules regarding which terms you’re not allowed to use for your corporation. But these rules tend to say the same thing: you have to describe your company accurately, and you can’t use misleading terms.

So, you have to use words like company, corporation, incorporated, limited, or some abbreviation of one of these words (Inc., Corp., etc.).

Also, you can’t use words like bank, credit union, trust, trustee, or law office without approval. That’s especially true when the words you use don’t actually describe your corporation.

You also can’t use any words or terms that might lead people to think that your corporation is some type of governmental department.

Other terms that may not be used are those words that imply that your business is in some way illegal. So, XYZ Smuggling, Incorporated may not be a viable option.

Reserve Your Corporation Name

What if you already have a great corporation name that’s unique and legal to use, but you haven’t formed your corporation yet? It can be frustrating when you finally submit your corporation papers and someone get there first.

But in many states, you’re able to reserve your corporation name. That means no other business can use the name for a given time (such as when your state has a name reservation time of 120 days). You can file the reservation with the state website.

Keep in mind, you also should reserve your business name as your web address. If your corporation name is ABC123, then it makes perfect sense to get the ABC123.com domain. That may keep other companies (especially your competitors) from using that website address for their own purposes and against your interests.

Raise the Funds

You can’t make money without spending money, as a rule. That’s certainly true when you’re formally starting a business corporation. You usually have to pay fees to the state. There are the fees to the online formation service you will use, along with the fees for the registered agent.

Just starting a corporation won’t really cost a lot, technically speaking. In most cases, you’ll spend less than a thousand dollars. In fact, you’re likely to spend less than a couple of hundred dollars before you officially form a corporation.

But in general, you need capital to get your business running. You’ll need money for your office, equipment, and for any person you might get as employees. You’ll need money to create your products and to enable you to offer your services.

There are several ways you can raise money:

You can use your own money, investing the money you saved beforehand. This can work for simple operations or short-term businesses.
You can borrow money from friends and family, although many experts don’t recommend this. If your company fails, then you might socially endanger your relationships with these folks.
You can borrow from the bank, and the bank people will examine your corporation closely to see if it’s worth the risk.
You can go with an angel investor or a venture capitalist, who can provide capital for your business in exchange for stock in the company.
Other potential funding methods include crowdfunding, where you have lots of people can chip in some money in exchange for ownership rights and special privileges (like preferential customer treatment).

You’ll need to think about all these methods as time passes. After all, if you’re running a successful company, then you may gain more customers. That means you’ll have to expand your operations to meet the demand, and for that you’ll need more capital.

Step2: Hire a Registered Agent

This is a requirement for all states, although some states may have a different name for the role. In some cases, they’re called the agent of process or the statutory agent.

What’s A Registered Agent?

Regardless of what they’re called, when you officially submit your documentation paperwork to form your corporation, you’ll need to include the name and address of the registered agent. Without this bit of information, your petition to form a company will be denied.

The role of the registered agent is to officially receive federal and state legal documents on behalf of your corporation. The registered agent must have a physical address (a P.O box won’t do) and a person must be there at that location to receive the documents sent to your corporation.

These documents are all important, which is why you’re required to get a registered agent for the role. The documents sent to your corporation may include require tax forms, such as the ones from the IRS. The state government may send a request that you file some type of report, like the annual report. Your corporation may also be sued, in which case you’ll get a summons.

When the registered agent receives the documents, they notify your corporation and send you a copy of the documents. These days, this is done electronically through the Internet. Often, the registered agent maintains an online storage site for all your legal documents.

Who Can Be the Registered Agent?

Technically, you don’t have to hire a professional registered agent. You can be your own registered agent, but that can be quite inconvenient for you. That means you’re tied down to that particular location during business hours. You won’t be able to keep meetings held elsewhere, or visit other locations that are important for your business. You may not even have an actual physical location for your business, which is often the case when you’re running an online business. That means you may have to use your own home address, and that will make your home address public.

This is especially problematic when you’re establishing your company in more than one state. That means you will have to have a registered agent in each state, and a physical location for each registered agent. This is impossible if you’re the only registered agent for your company. You can also hire an employee, or some close as your registered agent. Different states have different rules regarding who can be a registered agent. At the very least, the registered agent has to be an adult, has to have a physical address, and must be present in the premises during all business hours to receive the documentation.

But that can be unreliable as well, compared to when you have a professional registered agent company. With a professional registered agent, you have some who can receive the documents. They have their own address, so your home address won’t have to be public.

They can scan the documents and then send copies to you and to all other important people in your corporation. They can maintain the online document storage platform for you, as you may need some of your official documents as you run your business. For example, banks may require that you submit certain official corporate documents before you’re allowed to open a business bank account or before they provide your business with a loan.

Registered agent services are also reasonably affordable. You may pay perhaps $200 per year. Some online formation services may even include free registered agent services, at least for the first year.

You may also receive special services that regular registered agents won’t offer. For example, they may maintain a corporate compliance calendar and notify your business when you need to submit certain forms to the state government at a certain date. That makes it more unlikely that you’ll miss the deadlines, so you can keep your corporation in good standing with the state government (or with the IRS).

Hold Your Corporate Meeting

The first meeting of all the decision makers for your corporation is crucial. In this meeting, you will lay down the very foundation for your corporation. During this meeting, you’ll come up with all the rules needed, to which everyone will agree.

The Initial Directors

First, you will have to select your initial directors. The number of required directors may vary depending on the state. In some states, even a single director may be enough. That’s often the case when you’re the only owner of the corporation.

But you can always have more directors later on, or replace your current directors. This is especially true when your corporation grows bigger, and you may need more people on board to help run the company.

The directors are basically the decision-makers for the corporation. They generally end up with many responsibilities, but at the outset, they have 2 basic duties.

Firstly, they’re responsible for the bylaws of the corporation. These are the rules by which the corporation will be run. The job of the directors will be to come up with the bylaws to which everyone agrees with. Later on, these directors can still vote to amend or even discard certain rules.

The directors are also responsible for picking the officers that will run the corporation. While the directors may be in charge of the strategic direction of the corporation, these officers will be responsible for the day-to-day operations and decisions. Of course, it’s entirely possible that the directors themselves may hold operational offices.

Generally, you’re required to record the names and addresses of the initial directors. This document must be kept in your official corporate records.

Step 3: Holding the Directors’ Meeting

You will be required to record the minutes (details) of the meeting. This means you record all the decisions made during this meeting, along with all the other information coming off from the discussions.

The meeting is often a formal affair, with attendance taken and noted. You need to show that you have the requisite minimum number of required directors to make valid corporate board decisions. The directors will then decide on various details regarding the corporation, such as:

The appointment of corporate officers, such as the chairman and the secretary.
The creation and adoption of the approved bylaws for the corporation. The bylaws will lay out various details, like the roles of directors and officers, specifics on how the next meetings will be held, how the directors and officers will be chosen, how corporate records will be kept, and how disputes between directors and officers will be handled.
The approval of other rules and policies, such as the “conflict of interest” policy.
The details of the share policy.

Again, you need to make sure you record all the minutes of the meeting. Then the minutes will be added to your corporate records.

Generally, your records will have to include all your official documents. These will include the minutes of all directors’ meetings (most especially the first meeting), the bylaws, the stock document, and the certificate of formation.

Deciding Your Corporate Structure

Along the way before you file your formation documents, you and all the other directors will have to decide on the corporate structure of the corporation. In general, you have 4 options to choose from:

Sole proprietorship. This is a quick and easy way to formalize your personal business. With this option, you’re not actually separating the business from your person. That means your personal assets will be at risk.

On the other hand, you won’t have to deal with any paperwork, not even with filing annual reports. You’re in complete control with no directors’ meetings to deal with. Most importantly, there are no corporate taxes, either.

LLC. With a limited liability corporation, you at least succeed in separating your business liabilities from your personal assets. The LLC can have only a single owner, or several owners. Still, even with several owners, the management rules aren’t really all that stringent. There are no taxes on the corporate level as well.
C Corporation. Under the IRS rules, this is the standard type of corporation. You can have unlimited shareholders, with no restrictions on ownership or stock classes.

But the main disadvantage with this structure is the double taxation. That is, the corporation itself pays taxes on its earnings, and then you’d still have to pay taxes on whatever dividends you earn.

S Corporation. The main advantage with the S Corporation is that there’s also no corporate-level income tax. The taxes are only at the individual level.

But you can only have 100 shareholders at the most, with only one type of stock. All shareholders must also be US citizens or residents.

Step 4: File Your Formation Documents

You can do this on your own, and you will only have to pay the state fee for forming the corporation. The secretary of state website for your state will usually have instructions you can follow so you can submit the proper documents.

But you’d do well to simply hire an online formation service to do this job for you. Doing this on your own comes with too high a risk that you’ll get it wrong. Mistakes will just unnecessarily delay the process, as each mistake may result in a rejected corporation application.

With an established online formation service, mistakes rarely (if ever) happen. The people who work there are too experienced at the job. They can help you through the entire process, telling you what to expect and what to do. They will help with all the details that you might miss.

They can also offer various services that you will need for the start of your business. Often, their services also come with registered agent services. Other services may include compliance service, reminding you of what reports you need to submit at particular times to make sure your corporation remains in good standing with the state.

It’s also quite easy to go through the process of hiring an online formation service. Everything’s online, so you don’t have to meet with lawyers as in the old days. The cost isn’t much either, with some great online services offering basic service packages for less than $100.

Picking an Online Incorporation Service

Deciding to go with an online incorporation service to handle the formation of your corporation is actually an easy decision to make. The costs are negligible, compared to the convenience and reliability you enjoy as a result.

What’s more difficult is picking the right online formation service. While it depends on your budget preferences, and particular needs, you need to consider the following factors before you make your choice:

Brand History and Reputation

Picking the right online formation is very much like picking the right provider of any other type of professional service. First things first: you have to be sure that the supposed professional service you’re hiring is actually a professional in the job you hired them for.

That means you should start with the brand history. It’s more reassuring when you know that the online formation service has been around for many years now. This is proof that they have the requisite experience for the job, and that they’ve been doing satisfactorily all these years. A business won’t last long if it doesn’t know what it’s doing.

Along with how long the formation service has been around, you should also find out how many customers they’ve served during all those years. Being around for the last 10 years isn’t as impressive when they haven’t served as many customers as younger online formation services.

Finally, you should to check that those customers were actually satisfied with the service they got. It’s more reassuring when you find plenty of satisfied customer reviews, rather than a lot of complaints.

Costs and Value for Money

You should check out exactly what services and features each online formation service is offering, and for what price. Just remember that the quoted costs on websites don’t usually include the state fees for forming a corporation.

Services that you will need include preparing and filing the necessary documents, checking the name availability, obtaining the EIN, and online access to your incorporation documents. Many of the top online formation services also offer registered agent services as part of a package, at least for the first year.

Other online formation services may also offer compliance support, templates for various documents, and even support for your business website.

Step 5: Obtain Your EIN

The EIN refers to your employer identification number, which functions as the federal tax ID number given to you by the IRS. Your federal tax ID then becomes an integral part of the identity of your corporation, much like how the Social Security number works for a person. With this EIN, your corporation then gets a more distinct identity from your person—and more importantly, from your personal assets.

Your corporation cannot really function well without the EIN, or even function at all. You need the EIN so you can pay the federal and state taxes. The bank will need the EIN if you open a corporate bank account for your business. And you’ll also need the EIN when you hire employees for your corporation, even if you’re the only one working for your business for the moment.

At first glance, this is quite an easy step. All you really need to do is to visit the IRS website, where the instructions for obtaining the EIN are easy to understand. It’s even free to obtain, as you don’t need to pay a fee for it.

Some online formation services may offer this service as well. It may be an extra service for which you’ll pay an additional fee, or it may be part of a service package.

To obtain your EIN quickly, you’re well-advised to have your business information ready. These will include:

The name and address of your business, among other business details
The name of the main business owner or controller of the business
The tax identification number of the main business owner
The corporate structure (corporation, LLC, sole proprietorship)
The date the business was started (or was acquired) by the current owner or controller
The highest number of employees expected in the next 12 months
The reason for applying for the EIN
The line of merchandise or the main service offered by your business
Whether or not you’ve applied for an EIN for this particular business before

All you really have to do is to get on the IRS website and apply for the EIN. You just have to answer the questions about your business in the website. Once the information has been validated, you get your EIN right away.

Once you get your EIN, you normally don’t need another one. But you do have to file for a new EIN for special situations, such as if the business has changed ownership or it has changed its corporate structure.

That means you may need a new EIN when:

A sole proprietorship (or a partnership) buys (or inherits) a new business
A sole proprietorship gets a new partner
A partnership ends and becomes a sole proprietorship
The corporation becomes involved in a merger

You don’t need a new EIN when you change your business location, or even if you changed the corporate name. But you may need to inform the IRS of these new developments and changes.

Establish Your Website

While you’re waiting for the completion of the formation process, you may as well create your own business website. Websites these days help to reassure customers and clients about the authenticity of your business. If you don’t have a website, people may think there’s something fishy about your brand.

A website is a great help when it comes to marketing and advertising. You can post information about your brand without worrying about space. You can post more information than with a print ad in a magazine, or even a TV advertisement. And of course, your website can also function as an online selling platform.

You’d do well to hire actual experts to do this for you, such as a website designer. But you can also go with a website builder, which allows you to build your own website with drag and drop methods and website templates. Just remember that if you don’t have a website professional, you’ll have to maintain and update the website yourself. That may take a lot of your time.

Final Words

In the end, you’ll get back your documentation and you’ll finally have a formal corporation to run. It’s actually simple to form a corporation, especially with the help of an online formation service. That way, you can complete the process efficiently and without any mistakes. There are plenty of reputable online formation services out there.

You can get all the formation services you might need, including registered agent services and compliance support.

You’re also free to work on your business, while the formation services deal with most of the formation process. You can concentrate on building your products and services, dealing with marketing and advertising, and raising capital. Meanwhile, the online formation service handles the tedious filing of the formation paperwork, and waiting for the formation certificate to arrive.

It’s really that simple in the end. We’re not talking about how to run a successful business. You’d need a book (or an entire library) for that one. But when it comes to forming a corporation, the process is a lot easier.

How to Start a Corporation – Form a Corporation