How to Incorporate a Business

Learn how to start a corporation by following the process outlined below.

Although forming a corporation is more complicated and expensive than simply operating as a sole proprietorship, the process of incorporating is not that difficult. Incorporation involves a two-step filing process: filing Articles of Incorporation and appointing a registered agent.. And, incorporating has significant advantages, such as personal asset protection, additional credibility, name protection, and more.

Forming with the state is not unique to corporations: Many of the formation and annual compliance requirements that apply to corporations apply in a similar manner to limited liability companies (LLCs) and other formal state entities, such as limited liability partnerships (LLPs).

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Pre-Incorporation Consideration

Filing the Articles of Incorporation, with the concurrent designation of a registered agent, should be a straightforward process that is the culmination of advance planning.  The key decisions that must be made prior to filing paperwork are

  • Selecting the type of corporation
  • Choosing the state of incorporation
  • Selecting the corporate name
  • Determining the registered agent
  • Deciding upon how many and what types of shares to authorize
  • Considering management structure, which will be reflected in the by-laws

Selecting the Type of Corporation

All corporations begin their existence with the filing of Articles of Incorporation.  But there are several different types of corporations. The most common of these are the statutory close corporation, the personal services corporation, the S corporation and the benefit corporation. Except for the S corporation (which is really a federal tax distinction completely unrelated to state law), the choice of corporation is made when the Articles are filed and they must include required language reflecting that choice. 

  • Close corporation.  A close corporation is one that is managed by its shareholders. Directors do not have to be elected and officers do not have to be appointed. In addition to these formalities being eliminated, the laws usually streamline some of the other meeting and voting requirements.  However, not all states permit this type of corporation. (Delaware and Nevada are among those that do.) The states that do impose limits on the number of shareholders (usually 30-35) and bar selling shares to the general public.
  • Personal Services Corporation.  Many states require professionals form a personal service corporation, rather than a regular corporation. Only professionals can own shares and the corporation can only provide one form of service. For example, a professional corporation of lawyers can provide legal services, but not accounting services. Most states require the corporate name to indicate it is a professional corporation.
  • Benefit Corporation. A benefit corporation is a corporation whose stated purpose is to earn a profit for its shareholders and benefit the public.  About twenty states now authorize this blend of the traditional for-profit and non-profit corporations. More states are certain to follow given that Delaware now permits them.  The purpose section of the Articles of Incorporation must address the general and specific types of benefits that the corporation will pursue.
  • S Corporation.  An S corporation is a regular corporation that makes a federal tax election to be taxed as a pass-through entity under the Internal Revenue Code.  No specific statements are required in the Articles of Incorporation, but an S corporation can have only one class of stock, can have no more than 100 shareholders and cannot have certain types of individuals and entities as shareholder.

Choosing the State of Incorporation

A corporation does not have to be organized in the state in which it is going to do business; it can be organized in any state. Many corporations organize in Delaware or Nevada to take advantage of those states' favorable corporate laws and court rulings.  This is particularly the case for corporations that intend to become publicly traded corporations.  For small businesses, the advantages of Delaware or Nevada incorporation are less clear-cut. However, if close corporation or benefit corporation status is desired, the company must incorporate in a state that permits that corporate type.

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If a corporation is formed outside of the state where it does business, it must immediately register as a foreign corporation in the state where it is doing business. (This process is also frequently referred to as "foreign qualification.") If the company does business in multiple states, then it must register as a foreign corporation in each of these states.

There are initial fees to be paid to every state where a corporation registers as a foreign corporation. Plus, there are annual fees and reporting requirements imposed on foreign corporation. For this reason, a small business may opt to incorporate in its home state.

Selecting the Corporate Name

While professional advice may be less necessary when picking a corporate name, advance planning helps here as well.  Not only must the corporation's name meet the state naming requirements, it must be available for use. If the name is already in use by another corporation, or by any other entity in some states, the incorporation documents will be rejected.  For this reason, checking name availability is critical. 

However, checking name availability only verifies that name is available at the moment the check is made.  Until the Articles of Incorporation are filed, the name is available for use.  Many savvy business owners will take advantage of the state's name reservation system in order to guarantee that the ideal name is available when the planning process is completed and the Articles of Incorporation are filed.

Designating the Registered Agent

All states require that a corporation have a registered agent in the state. Every state also requires that the registered agent be a resident individual or a corporation that is authorized to serve as a registered agent in that state. Although states vary in their precise requirements, generally registered agents have a business office in the state and are either a resident individual or a domestic or qualified corporation. In addition, the registered agent must have a physical address in the state, and this address cannot be a post office box.   

The registered agent received official state correspondence for the corporation.  The registered agent also received service of process if a lawsuit is brought against the corporation. For this reason, it is critical that the registered agent be both competent in handling extremely important documents and available to receive those documents during normal working hours throughout the year.  For this reason, many companies opt to use a professional registered agent, even in the home state.

If a corporation registered as a foreign corporation, the requirement that the registered agent be a resident makes use of a registered agency service a virtual necessity.

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Deciding How Many and What Types of Shares to Authorize

While the information requested on the Articles of Incorporation regarding stock to be issued is basic, these initial choices will have a long-term impact on the business and should be given careful consideration. The number of shares authorized can have ramifications for franchise tax purposes and when the business seeks to expand. Having more than one type of can prevent the corporation from making an S corporation election. Failure to provide restrictions on transferability can preclude close corporation status. While the initial Articles can be amended, this is both time-consuming and expensive. ­It is best to seek professional advice regarding the number and types of shares that are initially authorized.

Considering Operating Structure

The Articles of Incorporation ask for very little information regarding the actual functioning of the corporation once it is created.  However, holding organizational meetings are first tasks that must be accomplished when the certificate of incorporation is granted—and this included adopting by-laws.  Thus, it makes sense to have considered these issues prior to filing the Articles of Incorporation. Corporate bylaws must be tailored to meet the specific needs of your business. One size truly does not fit all.

However, your bylaws should address the following key areas:

  • Shareholder rights and responsibilities (including information regarding the annual meeting, consent of shareholder in lieu of meetings, and voting requirements)
  • Stock (including provisions for transfers and nominees)
  • Board of Directors (provisions establishing number, term of office, powers, procedures for removing a director and filling a vacancy; information regarding meetings, quorums)
  • Officers (including provisions regarding qualifications, elections, term of office, duties, procedures for removals and filling vacancies, policies regarding loans to officers and officers’ salaries)
  • Dividends (how declared and when paid)
  • Other provisions (including authority to execute documents binding corporation, sign checks, indemnification of directors and officers, governing law to apply, provisions for amending the by-laws)

Incorporation:  A Two-Step Process

A corporation is a creature of state law—created and governed by the laws of the state in which it is formed. The incorporation process involves two distinct steps, although they often happen simultaneously:

  • Filing Articles of Incorporation with the secretary of state's office in the state in the incorporation state
  • Appointing the initial registered agent for the corporation

The Articles of Incorporation give particulars about the name, purpose, and equity structure of the corporation. The corporation's registered agent is also identified in the Articles of Incorporation.  The information required in the Articles of Incorporation is relatively consistent across the states--although each state has specific rules regarding permissible names and purposes.  

Commonly required information includes:

  • Name of corporation
  • Name and address of the corporation's registered agent
  • Corporate purpose  (Most states permit a broad statement of purpose and using a general statement is generally advisable for a for-profit corporation)
  • Authorized shares, including the class, preferences, restrictions, and rights
  • Issued shares (Many, but not all states require this. Delaware is among the states that do not require this information.)
  • The names and addresses of the initial incorporators

Post-Incorporation Actions

Once the secretary of state's office accepts the Articles of Incorporation, it issues a certificate of incorporation. Many states require that a copy of the certificate of incorporation be recorded in the local recorder's office where the corporation resides.

The receipt of the certificate of incorporation also triggers a series of meetings and actions that are necessary to establish the corporation as a fully functioning, independent entity.  Failure to hold these required meetings and properly document them (unless the corporation is a close corporation) can cost the owners their limited liability protection. For this reason, many corporations purchase a corporate record kit at the time of incorporation, or shortly thereafter.

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Although a corporation is owned by its shareholders, shareholders don't have any control over the day-to-day operations of the business directly. Instead, the shareholders are responsible for electing directors of the corporation who oversee the operation of the corporation and make major corporate decisions. The directors appoint the officers who are responsible for the day-to-day business decisions.  

The first meeting is of the incorporators who elect the initial board of directors. The directors then meet and adopt bylaws, issue stock certificates to the shareholders and appoint officers.  All of these actions are documented in the corporate record book.

Going forward, there will be annual meetings of shareholders and directors, as well as state compliance responsibilities, such as annual reports and franchise taxes. In addition to these annual obligations, any financial dealings between the corporation and its shareholder, directors and officers should be evidenced by a corporate resolution.

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