How To Start A Corporation
Entrepreneurs are riding a wave of an economic and technological transformation sweeping through the country and indeed, the world. Since the pandemic, we have witnessed more transformation than we have seen in the last few decades combined. The rate of new business formation has exploded, and continues to remain high. Traditionally, entrepreneurs have used a limited liability company (LLC) as their preferred business structure. However, since 2018 when the Tax Cuts and Jobs Act of 2017 came into effect, the nominal federal corporate tax rate in the United States has been a flat 21%. In addition, state and local tax rates largely follow federal notions and definitions. Therefore, corporations have become more attractive to entrepreneurs. If you’re sensing that now is the time for you to start a new business, then this is the article for you.
What is a Corporation?
Typically, when we refer to a corporation, we are referring to a C corp. They provide shareholders with the strongest possible personal liability protection. Corporations are normally more costly to form than LLCs and other business structures. Corporations are also more cumbersome to operate, because of the higher requirements to keep records, have more operational processes and have more reports.
Corporations also pay income tax on their profits, compared to LLCs, partnerships, and sole proprietors. Corporate profits may also be taxed twice, when profits are earned, and when shareholders receive dividends.
Corporations are wholly segregated from their shareholders. The 14th Amendment has in fact enshrined the doctrine that corporations are “people”. Shareholders can buy or sell company shares without a corporation being affected in any way.
Corporations are allowed to raise capital through the sale of shares in the company, and offer employees shares in the company. Indeed, corporations have greater tools for raising capital than any other company structure. If your business needs to raise capital, this is the ideal business structure. An LLC simply cannot go public.
How to Start a Corporation
- Write a Business Plan
The first thing to do is to write a business plan. This is generic to all business structures, but is fundamental. A business plan has two main benefits:
- It allows you to clarify to yourself whether or not you have a viable business plan, and how you will go from business idea to profitable corporation.
- Without a business plan, you will not be able to raise capital from lenders, or by issuing stock in the company. Lenders will want to know if you have the capacity to repay any loan they give you. Potential shareholders will want to know if you will be able to earn attractive returns on invested capital (ROIC) and economic profits.
- Find a Domicile
Every state comes with its pros and cons. You want a state that has a low or even zero corporate tax rate, and other favourable tax arrangements, as well as a favourable business environment. Colorado is a favourite of mine. According to the Tax Foundation, Colorado has the sixth lowest corporate tax rate in the United States, at 4.63%, and is one of the lowest for individual taxes. The state has a simple tax structure, with a flat tax, and a standard deduction. Colorado is a state you should really learn more about.
- Register the Business’ Name
Every business needs a name, and your first decision is to pick a name for your business. You have to check with the secretary of state or the state department of commerce, to see if your preferred business name has already been taken. In addition, you should know that some states restrict the kinds of names you can use. For example, there are limitations on the use of words such as “fidelity” and “trust”, because they are suggestive of baking and insurance. States also demand that corporations have Inc. or Corp. suffixed to their business name. SO, for instance, if your business name is Chocolate, its full name will either be Chocolate Inc. or Chocolate Corp. You can reserve your preferred business name with the secretary of state or the state department of commerce for some period of time.
- Nominate the Corporations Directors
State laws allow you to create a corporation with just one shareholder, yourself, who can act as the corporation’s chief executive board,a chairman and sole board member. In most cases, however, corporations have to have a number of shareholders.
The board of directors oversees the company and acts in the interests of shareholders to ensure that management acts in the best interest of those shareholders. It is the board that appoints the company’s officers, starting from its top executives, the chief executive officer and chief financial officer.
- Write the Bylaws
Although not every state obliges a corporation to have bylaws, you are advised to have them, even if you are the sole person involved in the corporation. Bylaws articulate how the business will be run. It defines all the procedures not just for running the company, but also how disputes and conflicts of interest will be resolved. Although you might be the only shareholder, writing the bylaws is a great exercise for clarifying how the company will be run, and will help you envisage how the company will grow in the future.
- Write the Shareholder’s Agreement
The shareholder’s agreement is another vital document, again, even if you are the sole shareholder. The shareholder’s agreement states the rights and obligations of each class of shareholder, who is allowed to become a shareholder, how succession will be handled, and how the initial block of shares will be valued.
- Get a Registered Agent
You have to have a registered agent to accept service of process. You cannot be your own registered agent. A registered agent can be a company officer, a registered agent service, or some other third party. However, a registered agent has to be available at all times during working hours of the week. Once your registered agent receives service of process, say, a subpoena, the law equates that with giving your business service of process. So you want a reliable registered agent who will be there when service of process needs to be done, and a registered agent who will be prompt in handing it over to your business.
- File the Corporation’s Articles of Incorporation
Finally, you need to file articles of incorporation with your state’s secretary of state. This document has all the necessary information about the company. The articles of incorporation can be filed online or in person. Each state has its own filing fees.
