Are you prepared to grow your company further? Choosing to start a corporation in the US opens doors to exciting possibilities. It’s more than just paperwork; it’s about securing your vision with a structure that offers protection, credibility, and growth potential.
Even if there are a few essential phases in the procedure, it is completely doable. Dive into our step-by-step guide tailored to entrepreneurs like you, and embark confidently on this empowering journey of building something enduring.
What Is a Corporation?
Let’s talk about the very core concept of today: The “Corporation” business structure of the US.
- A corporation is a legally recognized, autonomous corporate entity owned by its shareholders.
- Corporate owners are not personally liable for corporate obligations. This implies that no debts or actions of the firm are directly owned by shareholders.
- In a corporation, shareholders don’t have direct access to the company’s assets or money—but they can earn the dividends.
- Dividends are paid only if the company’s board decides to distribute them.
- Aside from dividends, shareholders earn nothing from the firm until they sell their stake in the company.
- Shareholders elect one or more directors. Thus, the board of directors governs a corporation’s business structure.
- The board approves significant company decisions, establishes numerous policies and processes, and selects executives.
- These executives have various positions, including president, secretary, and treasurer. They are the only ones with the authority to execute contracts and manage the organization on a daily basis.
Types of Corporation Company
Choosing the right type of corporation depends on your business needs; as there are a few types:
C Corporation
C Corporations are traditional for-profit entities. They file articles of incorporation and can sell stock publicly, making them perfect for businesses looking to grow and attract investors. The downside? They face double taxation, meaning both the corporation and shareholders pay taxes on profits.
S Corporation
To form an S Corporation, you first file articles of incorporation with your state and then submit IRS Form 2553. S Corporations are great for small businesses because they offer tax advantages; profits and losses pass through to shareholders’ personal tax returns, avoiding the double taxation issue. However, there are limits on the number and type of shareholders.
B Corporation
B Corporations are for businesses committed to social or environmental causes while still making a profit. You start by filing articles of incorporation and then get certified by B Lab. This type attracts investors who value ethical practices and offers greater transparency and accountability. The trade-off is the additional scrutiny and compliance requirements.
Professional Corporation (PC)
Professional Corporations are tailored for licensed professionals like doctors or lawyers. PCs provide tax benefits and protect individual shareholders from liability beyond their own malpractice. In some states, certain professionals must form PCs, while others have the option to choose this structure. It’s ideal for those seeking liability protection within their field.
Nonprofit Corporation
Nonprofit Corporations are formed similarly to for-profits but include specific clauses to qualify for tax-exempt status. Nonprofits benefit from tax exemptions but must reinvest profits into their mission rather than distributing them to shareholders.
Each type of corporation offers distinct benefits and challenges, so consider your business goals and needs when choosing the best structure for your venture.
Though most corporations are established as C Corporations. However, some choose to become S Corporations to avoid the double-taxation drawback of C Corps.
Why Should I Choose a Corporation for Company Formation in the US?
Before jumping into how to start a corporation, let’s talk about why this structure might be a good fit for your business. Here is a basic look at the advantages and disadvantages:
Benefits of Starting a Corporation
- Protect Your Personal Assets: One of the biggest benefits is keeping your personal stuff safe. If the business gets into trouble, your personal assets, like your house and savings, are protected.
- Funding Facilities: Need funds to grow? Corporations can sell stock, making it much easier to attract investors and get the capital you need.
- Business Stability: Corporations don’t just disappear if you or other key people leave or pass away. They keep going, which means your business has a life of its own.
- Boost Credibility: Having “Inc.” or “Corp.” after your business name can make you look more credible and trustworthy to customers, suppliers, and investors.
- Tax Perks: Corporations can deduct certain business expenses. And if you opt for an S Corporation, you can avoid the double taxation issue.
A corporation might be a great fit if you’re aiming to grow your business, attract big-time investors, and protect your personal assets. It’s also ideal if you want your business to last beyond your involvement.
Drawbacks of Starting a Corporation
Double Taxation: C Corporations get taxed twice—once on the company’s profits and again on dividends paid to shareholders.
- More Paperwork and Costs: Setting up and running a corporation involves more paperwork, higher costs, and stricter regulations than other business structures whether you form a corporation online or not.
- Formalities: Corporations have to follow formal rules like holding annual meetings, keeping detailed records, and sticking to bylaws.
- Less Direct Control: Shareholders elect a board of directors to make big decisions in a corporation, so founders might have less direct control over the business.
A corporation might not be the best choice if you want to keep things simple and avoid extra paperwork and costs. Dealing with double taxation can be a major downside unless you structure your company as an S Corporation—which is for only US residents.
What Do You Need to Know Before Forming a Corporation?
Starting a corporation involves some crucial decisions that will shape the foundation of your business. Once you have considered why a corporation might be the right choice for your business, it’s time to dive into some important considerations before you begin the process:
Choosing the Right Type of Corporation
Once you’ve decided to start a corporation in the US, the first critical step is choosing the right corporate structure as a business owner. Your choice will significantly impact your business’s tax obligations, liability protection, and growth potential.
While several options exist, C Corporations (C Corps) and S Corporations (S Corps) are the most common in the US with key distinctions. Such as:
S Corporation:
- Tax Treatment: S Corporations are pass-through entities, meaning profits and losses are reported on shareholders’ personal tax returns, avoiding double taxation at the corporate level.
- Limitations: This type of corporation is limited to 100 shareholders and must meet IRS rules on reasonable salaries for employees.
C Corporation:
- Tax Treatment: C Corporations can have unlimited shareholders. It means that there’s no limit on the number of shareholders, which supports expansive growth and fundraising opportunities.
- Limitations: C Corporations are taxed separately from their owners. They face double taxation. Earnings are taxed both at the business level and when paid as dividends to shareholders.
When making a decision, consider the following variables:
- Your business’s size and growth potential.
- Ownership structure and number of shareholders.
- Tax implications and your financial goals.
Choosing the Right State for Incorporation
After determining the structure, you can then select the state of incorporation based on factors like –
- Consider where your business will primarily be active. Incorporating in your home state might simplify compliance and reduce costs.
- Look into the legal and tax benefits offered by different states to see if another location better suits your business needs.
Considerations for Residents and Non-Residents
Here’s the most common concern that appears when individuals want to incorporate a corporation- Whether both residents and non-residents form corporations in the US.
- Residents: For US residents, forming and managing a corporation is typically more straightforward. You can also opt for S Corporation status, which offers potential tax benefits.
- Non-Residents: Non-residents can form a corporation online in the US but face additional complexities. They cannot elect S Corporation status and must navigate extra-legal and tax challenges.
To put it simply, understanding these factors will help you determine the best corporation structure for your business.
Legal Requirements to Start a Corporation Business
Once you’ve decided on the ideal corporate structure, the next step is to navigate the following legal requirements for incorporation:
- A Business name.
- Registered Agent.
- Directors.
- Articles of Incorporation.
- EIN.
Note: These are general requirements, and specific ones may vary by state. It’s a must to research your target state’s incorporation process thoroughly.
Steps to Forming a Corporation Company
So, now we are at the most awaited point!
Starting a corporation might seem daunting, but with the right steps and guidance, you can get your business up and running smoothly. Take into consideration the following streamlined guide to help you with the process:
1. Reserve Your Business Name
When you are prepared to commence your business, the registration of your business name is typically an automatic component of the filing process when you submit your articles of incorporation (except in Alabama, where a name reservation is compulsory before filing).
However, if you are not yet prepared to file but are certain of the name you wish to use, you may submit a business name reservation to your state. This essentially implies that no other business may claim the name for the designated period, which is 120 days in numerous states. The cost of reserving a business name is relatively inexpensive (although it is evident that the cost varies by state).
2. Designate a Registered Agent
The registered agent is the person in charge of receiving crucial state mail and legal notices, such as litigation notifications, sometimes known as “service of process,” on your company’s behalf. Your enrolled agent must be appointed when you file your articles of incorporation.
Technically, you can function as your own registered agent if you meet certain qualifications. However, this mandates your availability during conventional business hours on every workday of the year, which many business owners struggle to meet. That is why a large number of firms use registered agent services. This service accepts crucial business correspondence, uploads it to an internet portal, and notifies you via email or phone about papers that demand your attention.
3. Submit Articles of Incorporation
Typically, when someone discusses forming a corporation, they are talking about the process of filing articles of incorporation with the state. This is essentially the point at which everything is formalized. You fill out the form provided and submit it to the state with your company name, details, etc.
Currently, the majority of states offer an online filing system that is more convenient than the traditional methods of submitting in person or by mail (although these options are still available in many states). Filing fees are subject to substantial variation by state, rendering it difficult to provide a precise figure.
4. Create Corporate Bylaws
Corporate bylaws are essentially the official documents that list the principal shareholders in your company and regulate the manner in which your board of directors decides crucial matters on behalf of the company. Officer positions, board member election and term limit information, and meeting/vote processes are all normally included within the bylaws.
The bylaws may also include information on stock certificates, a definition of a majority or quorum, and the procedure for amending the bylaws. Corporate bylaws are typically drafted, put to a vote, and enacted during the first board meeting following the appointment of directors.
5. Hold the First Board Meeting and Appoint Directors
The incorporation process is significantly influenced by the initial board meeting. This typically occurs when shareholders nominate and vote on the board of directors’ members. At the initial board meeting, a variety of additional critical duties may also be accomplished, such as:
- Appointing corporate officers.
- Setting the corporation’s fiscal or accounting year.
- Passing the bylaws.
- Authorizing and issuing stock shares.
- Establishing a corporate seal and an official stock certificate form.
For the first year, the first board meeting satisfies the need that corporations hold at least one annual shareholders meeting, as required by most state laws. The decision to form the company as a S corporation is often put to a vote during the inaugural board meeting.
6. Draft a Shareholder Agreement
A document that outlines a shareholder’s responsibilities, rights, and beneficial aspects is called a shareholder agreement. It also usually outlines how new shareholders can be joined, how shares are to be priced properly, how many shares will be issued, and other details.
In contrast to bylaws, which are legally necessary for a corporation to exist, a shareholder agreement is not technically necessary for a business to operate. Nonetheless, having one is advised as best practice and can be very helpful in maintaining the health of your company in the event that there is a shareholder dispute.
7. Obtain an EIN, Permits, and Licenses
Next, as part of the corporation formation procedure, get your business permissions and licenses as well as your federal Employment Identification Number (EIN). A valid EIN is required for every corporation. In any case, you will need one to register a business bank account and lawfully recruit staff, among other things.
Obtaining your business licenses and permissions (i.g. Resale certificate, Lease agreement, etc.) is necessary after you have your EIN. From company to company, different permits will be needed. You will require licenses and permits at all governmental levels, from the county to the federal, depending on your industry.
To find out what licenses and permissions your state needs, you can go visit the website of your secretary of state.
If you wish to circumvent the complications of conducting your own research, you may wish to employ a business formation service—such as Business Globalizer—that provides business license search/report services.
8. File Your Beneficial Ownership Information Report
When forming a corporation, or if it incorporates after January 1, 2024, you must file a beneficial ownership information (BOI) report—non-filing will lead to penalties—unless your business is one of the 23 exempt companies. The Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury receives this report.
FinCEN’s goal is to reduce criminal activities such as tax fraud and money laundering by monitoring the flow of money entering the country, which is frequently done through shell corporations.
That’s it; By following the abovementioned steps, you can establish your corporation legally and efficiently, ensuring you’re set up for success from the start.
How Are Corporations Taxes Implied in the US?
When you start a corporation, you should be mentally prepared for tax implications to avoid legal consequences. Here’s a breakdown of how different types of corporations are taxed in the US:
C Corporation
C Corporations face double taxation. First, the corporation pays taxes on its profits at the federal corporate tax rate, which is 21%. When profits are distributed as dividends, shareholders also pay taxes on these dividends at their individual tax rates. Tax deadlines for C Corporations typically include quarterly estimated tax payments and an annual return (Form 1120) by April 15th.
S Corporation
S Corporations benefit from pass-through taxation, meaning the corporation itself does not pay federal income tax. Instead, profits and losses are reported on shareholders’ individual tax returns (Form 1120-S). This avoids double taxation. Shareholders must file their personal tax returns by April 15th, and the S Corporation files an informational return by March 15th.
B Corporation
B Corporations, also known as Benefit Corporations, are taxed like either C Corporations or S Corporations, depending on their chosen tax status. If structured as a C Corp, they face double taxation. If structured as an S Corp, they benefit from pass-through taxation. Deadlines align with those of C and S Corporations.
Professional Corporation (PC)
Professional Corporations are typically taxed as C Corporations unless they elect S Corporation status. This means they generally face double taxation unless they qualify and opt for pass-through taxation as an S Corp. PCs follow the same tax filing deadlines as C or S Corporations, depending on their election.
Nonprofit Corporations
Nonprofit Corporations enjoy tax-exempt status if they meet IRS requirements, primarily under section 501(c)(3). They do not pay federal income tax on donations received or money earned from activities related to their exempt purposes. However, they must file an annual return (Form 990) by May 15th. Nonprofits may still be subject to taxes on unrelated business income.
Understanding these basics will help you stay compliant and make informed decisions for your corporation tax filing.
Is the LLC the Same as a Corporation?
You may be wondering if a limited liability company (LLC) and a corporation are the same while you are looking at your startup possibilities.
Not quite—LLCs and corporations have some key differences. Both shield their owners from personal liability, so your assets are generally protected if the business runs into trouble. But LLCs are more flexible, letting you decide how you want to be taxed and managed. Often, they allow gains and losses to be moved straight to your personal tax return, which avoids paying corporation taxes.
Corporations are subject to more stringent regulations regarding their operations than other company forms. Having a board of directors and holding official meetings are two examples of these rules. Dividends are taxed to shareholders after the corporation pays taxes on its income. They might therefore pay taxes twice.
Your business goals and how you would like to handle taxes and management will affect your choice of whether to start a corporation or an LLC.
FAQs
Q1: Is that possible if I want to convert from an S corp to a C corp?
Answer: It is possible to change your corporate designation. To modify your corporation’s IRS status, you need the consent of the majority of shareholders.
Q2: How much does forming a corporation cost?
Answer: The cost of forming a corporation varies greatly based on a variety of criteria, including your state of incorporation, the sort of corporation you choose, the number of shareholders, and if you have hired a business attorney or tax professional. These might cost anywhere from a few hundred to many thousand dollars.
Q3: What exactly constitutes a tax election?
Answer: A tax election allows you to choose between being taxed as a C corporation or a S corporation. It is also where you decide whether to use a cash or accrual foundation of accounting. These are the terminology you will encounter when working with a tax professional. Your election will have an impact on the timing and amount of taxes you pay.
Q4: How many initial directors will I need to form?
Answer: Different states have different criteria. You may just need one, but you may require three or more. It is best to consult with your state or local small company attorney.
Q5: Is it necessary for my corporation to draft corporate bylaws?
Answer: It depends; not all states require your corporation to have corporate bylaws, but you should verify with the secretary of state’s office in the state where you intend to conduct business.
Final Words
Though it might be difficult to navigate the complexity of formation, legal procedures, and compliance, starting a corporation can be a rewarding adventure. Business Globalizer can help with that. From securing your company name to completing the required paperwork and acquiring the required permits, our team of professionals is ready to help you at every stage. With an emphasis on process simplification, we offer the assistance you require to successfully start a corporation.
If you are a non-resident looking to establish yourself in the United States, Business Globalizer assures you that you have the skills and resources needed to succeed. Let us help you realize the vision for your business!
