Advantages and Disadvantages of Forming a Corporation

If you are interested in forming a business there are a variety of entities to choose from. One type of business structure is a corporation, which is a legal entity separate from its owners. Learn how to form your own corporation and the advantages and disadvantages of doing so.

 

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Creating a corporation

Follow these steps to form a corporation:

 

1. Choose your business name

Include designation words such as "Limited," "Incorporated," "Corporation" or abbreviated versions in your corporation name. Check your state’s list of restricted words such as "national" or "reserve" and contact your state’s office to ensure your name complies with all other rules.

 

2. Make sure your name is available

Check with your state’s office about the availability of your business name to make sure you do not violate another company’s trademark. In most cases, you register the name when you file the articles of incorporation, but you can reserve it for a short period with a fee until then.

 

3. Register a "doing business as" name

If you intend to do business under a separate name from your corporate name, register a "doing business as" (DBA) name, also called a "fictitious name," "assumed name" or "trade name". DBA rules may differ on state, county and city level.

 

4. Appoint your directors and registered agent

Appoint yourself a director among other people. Each state has laws about how many you need. A registered agent is the contact person for your company who will receive government notices and compliance-related documents.

 

5. File articles of incorporation

Contact your Secretary of State office to get the right incorporation paperwork to fill out and file. They may be called "certificates of incorporation".

 

6. Write your corporate bylaws

Bylaws are rules governing how your corporation operates and includes information about stocks, meeting and record-keeping procedures and other business-related processes. Consult an attorney during drafting.

 

7. Write your shareholder’s agreement

A shareholder’s agreement is optional but protects the interests of shareholders if an owner passes or leaves the corporation and transfer ownership. Draft this with a professional.

 

8. Hold your first board of director’s meeting

In the first meeting, discuss the overall operations of the corporation including bylaws, appointing of corporate officers and authorizing the issue of stock.

 

9. Issue your stock

Large corporations must register stock offerings with the SEC and their state’s securities agency. Depending on the size of your business you may or may not need to fulfill requirements of the Securities and Exchange Commission (SEC).

 

10. Obtain business licenses and permits

Contact your local and state governments to determine which business permits and licenses you need before you begin official operation.

 

11. Register with state and local agencies and the IRS 

You must register your corporation with both the IRS and state and local revenue agencies. Refer to the IRS website for more detailed information.

 

12. Open a corporate bank account

Your corporation must have a bank account separate from the personal accounts of the owners for tax compliance purposes. Research different banks for the best account options.

 

Keep in mind that the incorporation of a company may differ in each state, so make sure to research your specific state’s requirements.

 

Related: 10 Steps to Starting a Business

 

Pros and cons of forming corporations

Keep these advantages and disadvantages in mind to determine if a corporation is the right business entity for you.

 

Pros of forming a corporation

Here are the biggest pros of incorporating:

 

  • Shareholders have limited liability: Shareholders are normally only financially liable for the amount of their investments, which protects their personal assets.
  • Corporations can raise funds: Publicly-held corporations can sell shares and issue bonds to raise funds for the business.
  • No life limit: Corporations have a perpetual life since ownership can pass through generations of investors. This means even after the initial founder has passed, the business continues to operate as normal.
  • Tax-deductible expenses: Owners may receive some tax-free benefits including retirement plans and insurance, and can deduct employee and officer benefit costs.

Cons of forming a corporation

Here are some cons of incorporating:

 

  • A corporation is a distinct legal entity: This means that the business is governed by a board of directors. If you want to maintain full control of your business a different business structure may suit you.
  • Double-taxation: Corporations pay taxes on profits of income distributed to shareholders, then shareholders pay taxes on their shares. Although it is not technically a double-taxation for the owner, it may be less appealing.
  • More complicated to form: Corporations require more documents and filing fees such as tax exemption paperwork, incorporation documents, state filing fees, attorney fees if necessary and annual documents and fees.

Frequently asked questions about business corporations

Below are some of the most commonly asked questions about corporations:

 

What is the difference between a C corporation and an S corporation?

All corporations begin as a C corporation but have the option to change to an S corporation. S corporations are not subject to double taxation and income is taxed at the personal tax rates of the owners, rather than at the corporate level. However, S corporations may only have one class of stock and a maximum of 100 shareholders.

 

Can one person form a corporation?

Anyone can form a corporation and all states allow corporations to have a single owner, but still must follow all the normal formalities to keep the corporation in compliance with state and federal laws.

 

Related: How to Hire Your First Employee

 

Does a corporation have to be formed in the state of operation?

You can form a corporation in any state outside of the one you do business in, but if you chose to file in a more tax-friendly state, such as Nevada or Delaware, but intend to do business in your home state, you must also file documents in your state. You may also foreign qualify to do business in multiple states.

 

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