Are you starting a business in America, and you’re looking for a business entity that can grow with your company?
Many entrepreneurs choose to form corporations, as this business type has long been one of the most popular options for American companies.
But what exactly is a corporation, and why is it such a common entity type?
This entity type provides entrepreneurs with a formal business structure that can easily grow with your company as you expand your operations. Below we'll outline everything you should understand about forming a corporation and how to incorporate in your state.
Select Your State & Incorporate
Select your state below to incorporate a business on your own. Alternatively, you can hire an online incorporation service to take care of the paperwork for you.
What Is a Corporation?
A corporation is a unique entity type because it allows a group of people to operate a business together, while the entity itself enjoys corporate personhood, which gives the corporation itself many of the same rights as a person.
In the eyes of the law, a corporation is an individual. Individuals are able to purchase assets, sue or be sued, hire employees, and more — corporations have those rights as well.
A unique feature of corporations is their ability to issue stock. No other entity type may issue shares. These stocks are owned by shareholders — essentially, a shareholder owns a percentage of the company’s net worth, and in a sense, shareholders are the owners of the corporation.
Simply owning shares does not make an individual a “manager” in the business, however. Instead, voting shareholders can elect the corporation’s directors. In turn, the board of directors governs the corporation by appointing officers, and those officers manage the day-to-day activities of the business.
Forming a corporation grants a few important legal protections. Most importantly, the corporation is an individual entity and is legally separate from the members which comprise it.
Due to this distinction, members cannot be held liable for the corporation’s debts, unless the business is maintained improperly, or if the owners acted in a fraudulent manner. Similarly, the corporation will remain unaffected by a member who goes bankrupt.
What Are the Steps to Form a Corporation?
Forming a corporation requires a considerable amount of time and planning, and you’ll also need to pay a few registration fees. Before you jump into the process, you should be sure that the corporation is the right entity for you.
The primary advantage of a corporation compared to other entity types is the potential to raise funds by issuing stock. However, it’s important to understand that since stockholders can play a role in leading the business by voting, you’re essentially giving up a portion of your decision-making to someone else. If you want to retain full authority, an LLC or another entity type may be a better choice.
Once you’ve decided on a corporation, you’ll need to follow these steps to form your business.
1) Choose a Name & Reserve It
Creating the perfect moniker for your business is the first step to your success. It’s nearly as important as your business concept itself. You’ll need to create a name that is both unique and compliant with legal requirements.
No matter which state you incorporate in, your business name cannot be the same as a name that’s been claimed by another entity, and it also cannot be too similar to any names already in use. There are also some restricted words like “bank” or “insurance” that are only available to businesses operating in those industries.
Once you’ve picked a name, you can either incorporate your business immediately or reserve the name for future use. Reserving your name will protect your name for a fixed period of time while you prepare to get your business set up. Aside from that, getting a domain for your business will be another huge step towards creating a brand for your business.
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2) Designate a Registered Agent
Corporations should also appoint a registered agent for the business, an important role that ensures the state always has a reliable point of contact for your corporation. You will need to include the name and address of your registered agent on your Articles of Incorporation document. Keep in mind that you can also hire a registered agent service to keep your personal obligations minimal.
3) File Your Articles of Incorporation
Your corporation is not officially formed until you file your incorporation documents with the Secretary of State. In most states, the necessary document is called the articles of incorporation.
The information included in this document varies from state to state, but there are several elements that are required by all states. First, you’ll need to choose a registered agent to receive important legal documents on behalf of your business. You’ll be asked to list the name and address of your agent on the form.
Next, you must appoint directors to serve on your initial board. Most states require you to have at least one to three initial directors, but you can appoint more if you wish.
4) Draft Your Corporate Bylaws
A corporation’s bylaws may be the most important document your business will have. Bylaws are legally required, and they outline many organizational policies of your corporation. The information you’ll need for this document includes some basic info about your business, including its statement of purpose, directors and officers, fiscal year schedule, meeting schedules, the process for adding or subtracting board members, dissolution process, and more.
5) Obtain an EIN
The next step is to acquire a federal tax ID number (often referred to as an EIN or employer identification number) from the Internal Revenue Service. This is similar to a Social Security number for an individual, as the EIN is a nine-digit number that’s used to identify your corporation for taxation purposes. An EIN can help your business accomplish many important tasks, including opening bank accounts, hiring employees, and more.
6) Hold an Initial Meeting With Your Board of Directors
The first meeting of your new board of directors will set the tone for all future business endeavors. You’ll need to discuss key features of your business, such as bylaws, setting up your stock and shareholder agreements, and appointing officers to manage the daily business affairs.
7) Register for Taxes
Taxes are a vital part of operating a compliant business, and you’ll need to register for taxes on both the state and federal levels. For example, most corporations will need to pay federal and state corporate income taxes — Wyoming and South Dakota are the only states without that type of tax.
Other taxes, such as employment taxes or industry-specific taxes, may also be required. Taxation can be complicated, so you may want to consult with a tax professional or an accountant if you have any questions.
8) Obtain Business Licenses
Most businesses will need to acquire at least one license to operate properly. For example, businesses involved in agriculture need to obtain a license from the U.S. Department of Agriculture, and many other industries also require licenses. In addition, some states have a general business license that’s required to operate any company. The Small Business Administration offers a helpful resource that you can consult for more information on licensing.
9) Get a Business Bank Account
The last thing you want is for your business expenses to get tied up with someone’s personal finances. That would defeat the purpose of forming a corporation, and could even see your owners lose their personal asset protection. To avoid the intersection of personal finances and your corporation’s, you’ll want to get a business bank account. In addition, this is a great time to set up your accounting system. The easiest option is to get accounting software like QuickBooks, but if your corporation has complicated financials, it might be a better idea to hire an accountant.
10) Maintaining Your Corporation
Once you’ve completed the formation process, you’re ready to operate your business. There are a few more important issues to address that can help keep your business running smoothly and legally.
First, you must pay your taxes every year, and since corporate taxes can be complicated, it might be a good idea to enlist the help of an accountant. In addition to taxes, most states also require you to file an annual report for your business, which gives the state a snapshot of your corporation’s activities for the year. Finally, it’s vital that every corporation keeps detailed records of all its business activities, including meeting minutes, your business ledger, financial reports, and more.
Pros and Cons of a Corporation
Like any business, there are pros and cons to operating a corporation. For some businesses, the rigid formalities of the corporation are more of a negative than a positive, and it’s no secret that corporations can require some extensive maintenance.
Below we’ll cover the six key advantages and five disadvantages of forming a corporation. Is it the right entity type for your company?
Pros to Forming a Corporation
1. Forming a corporation has significant advantages. Perhaps the most important advantage is the limited personal liability that accompanies a corporation.
Thanks to what’s commonly called the “corporate veil,” your personal assets are protected. If the corporation runs into debt or legal trouble, your own personal bank accounts, house, car, and investments cannot be taken as collateral. (Note: the corporate veil only functions as protection when the corporation follows the proper formalities as dictated by law).
2. Another advantage is that a corporation can issue stock in order to raise funds. Only corporations can sell stock. Both private and public corporations can issue stock, but public corporations gain the most by issuing stock. By selling stock or shares, corporations can gain funds for new projects and campaigns that would be unattainable otherwise.
3. Corporations can also deduct the cost of certain benefits they provide to their employees and officers. This deduction provides a tax cut that not all entity types can take advantage of.
4. In addition, the lifespan of a corporation is practically limitless. The entity will endure until it is intentionally dissolved by the owners, or the date of dissolution has been reached. (In rare instances, a corporation plans in advance to dissolve on a certain date).
5. Similarly, transferring the ownership of a corporation through the transfer of stock is fairly simple. For other entity types such as LLCs and sole proprietorships, changing owners requires a lot of paperwork and filing fees.
6. Finally, smaller corporations have the option to file for S corporation status, which grants significant tax cuts. This business entity has a “pass-through” form of taxation, which means taxes are only paid at the individual level, and there is no corporate income tax paid.
Cons to Forming a Corporation
Despite its benefits, there are disadvantages to a corporation that you should consider.
1. For one, corporations are relatively expensive both to form and maintain. For example, in Washington D.C., the cost to incorporate is $220, and an annual report costs $300. Not all states are so expensive, but almost all require an annual report each year, and other yearly fees exist as well. These costs can add up quickly.
2. Secondly, corporations are heavily regulated by the government. Regulations for corporations abound, as both the federal government and state governments have numerous rules. Most states have an entire chapter of their statutes dedicated to corporations alone. To maintain your personal asset protection, you must comply with these requirements.
As a result, you could lose some of your creative freedom and autonomy that you might have as a different entity type.
3. No one enjoys paying taxes, and unfortunately, the tax burden for a corporation is higher than most entity types. Technically, the personal tax liability is lower in a corporation, as you personally will pay taxes only on the income you receive as an employee, or from dividends you receive from the corporation. The corporation itself, however, pays a lot of taxes.
A C corporation is subject to what’s known as double taxation, so the burden can be especially high. With double taxation, the corporation pays corporate income tax on its own profits at a rate of 21%. Then, when it passes the remaining profits on to its shareholders in the form of dividends, the shareholders also pay taxes on their income from those dividends. The only way to bypass this heavy taxation is with S corporation status, which is exclusively available to smaller corporations.
4. If you want full control of the management of your business, then a corporation might not be the right choice for you. Usually, a corporation is led and managed by multiple officers, not just one owner, and in some cases, the management team can be left unaccountable to the actual owners of the corporation.
For example, if a corporation has a large number of shareholders but there is no clear majority, they would not be able to dictate the actions of the board. While these situations are rare, they can occur.
5. On top of being expensive, a corporation requires a lot of time. Simply filing the initial paperwork can require a significant time investment. Then later, you’ll need to file annual reports, maintain your business licenses, keep meticulous corporate records, hold meetings for your board of directors and your shareholders, and more.
You can hire someone to maintain some of your records and file forms on your behalf — by hiring a registered agent, for example — or do them yourself. Either way, you’ll spend time keeping these files up-to-date.
One of the most important decisions you’ll make about your business is which entity type to form, but choosing the right one can be tricky.
Knowing the pros and cons can make this decision a little easier. Overall, corporations are such a popular entity type for a good reason, because they provide entrepreneurs with a formal business structure that’s fully prepared to grow with your company.
The corporation is more expensive and time-consuming to maintain than a limited liability company, for example, but the LLC isn’t nearly as investor-friendly as a corporation is, and it’s not as well-equipped for growth either.
On the other hand, the LLC can have a lower tax burden than a corporation does. It’s all up to you to determine which entity type best fits the unique needs of your business.
Corporation VS Other Entities
Throughout this article, we’ve touched on the advantages and disadvantages of the corporation as compared to other types of business entities. If you want to know more about how the corporation compares to a sole proprietorship, general partnership, or LLC, we have full-length, in-depth articles available on each topic.
That said, let’s quickly summarize the similarities and differences between these business types, so you can get a firmer grasp on whether the corporation is the right entity for your company.
- Corporation vs. Sole Proprietorship / General Partnership: The sole proprietorship and general partnership are essentially the exact same thing. They’re both informal business entities that don’t require a formation process; the only difference is that a sole proprietorship is a one-person business and the general partnership involves at least two people. As we’ve discussed, these business types do not provide personal asset protection, which is such a massive disadvantage that we would essentially never recommend operating a sole proprietorship or general partnership instead of a corporation.
- Corporation vs. LLC: This is where things get a bit trickier. The LLC has some concrete advantages over the corporation, including flexible taxation, flexible business structure, a simpler formation process, fewer formalities, and (usually) lower maintenance costs. That said, the corporation has some of its own advantages, like the ability to issue stock and attract venture capitalists, as well as the well-established legal precedent of the corporation. For most small businesses, the LLC is the preferable entity type, although there are plenty of exceptions. For larger companies with ambitious expansion plans, the corporation is usually the right choice.
Things to Ask Yourself Before Forming a Corporation
Corporations aren’t for everyone. If you’re not sure whether you should incorporate or form a different legal entity, here are some important questions to consider.
They’ll help you determine whether or not a corporation is right for you.
1. How much confidence do you have in your business concept?
It’s impossible to predict just how the market will respond to a new business, but your gut might tell you that your business idea is perfect for your area. Being confident in your business concept is a good thing.
Creating a corporation requires both time and money, so you may want to avoid those costs unless you’re sure your business will work.
On the other hand, there are liability issues with operating sole proprietorships and general partnerships, so if you are confident in your business model, you should probably go ahead and incorporate your business.
2. How much risk is behind your business?
The amount of risky activities you conduct may affect the entity type you form, and here’s why: someone has to pay up when something goes wrong at your business.
For example, let’s say that you run a skydiving business. You make safety a priority, but one day, a faulty parachute harness causes one of your patrons to break their ribs during a dive. If the diver with the broken ribs sues, who pays for the damages?
This scenario boils down to personal asset protection. If you operate a sole proprietorship or general partnership, then you would need to pay for the settlement personally, as your assets would be confiscated in the event your business couldn’t make the payment. A corporation, however, has personal asset protection thanks to the corporate veil, so the corporation itself would pay for the settlement, not the individual members of the corporation.
Businesses with a lot of risk for potential harm face a higher risk of paying settlements like these, and therefore these businesses should consider forming corporations.
3. How much control do you want over your business?
Your entity type affects the amount of autonomy you have in your business affairs. Sole proprietorships, for example, are controlled exclusively by the owner. While there are a few government regulations for these informal business structures, they’re not nearly as comprehensive as the rules and requirements for corporations.
Corporations must comply with a huge number of regulations at both the state and federal levels. In addition, the control of a corporation rarely stays with the original incorporator. If the corporation sells stock that also carries voting rights, then the control passes to the shareholders as well.
If you want exclusive control over your business, a single-member LLC might be a better option.
4. What are your plans for growing your business?
If you have lofty plans to grow your business quickly, then you’ll likely need an efficient way to raise capital. Corporations have the unique ability to sell stock, and issuing these shares allows a business to raise funds quickly. Other entity types would have to apply for a loan or wait for their capital to increase through the natural flow of their enterprise.
Another area of growth you should consider is the number of people you want to bring into your business. Do you anticipate bringing in others as members or owners to gain their expertise, or do you simply want to hire employees? Your entity type affects how easy it is to add members to your business.
For example, adding members to an LLC requires additional paperwork, and a sole proprietorship would have to convert its entity type in order to add a new owner to the business. Corporations, however, have a much easier time changing or adding owners to the business, as a simple stock exchange can change its ownership.
Finally, if you intend to make shares of your corporation available to the general public, then you must form a corporation to do so. As we’ve already mentioned, corporations are the only entity with this privilege.
5. Are you okay with the drawbacks of forming a corporation?
Before you decide on a corporation, you should ensure that you’re both aware of and okay with the negatives that accompany this entity type. There are three primary drawbacks to consider.
The main disadvantage is the corporation’s obligation to maintain extensive corporate records and comply with legal requirements. As we alluded to earlier, there is a large number of rules to follow — simply reading these rules takes time, much less implementing them.
Corporations also have the disadvantage of heavier taxes than some other business types. Corporate income taxes can be quite high, and a few states charge both a corporate income tax and a gross receipts tax. In addition, C corporations are subject to double taxation: the corporation’s income is taxed, and then the shareholders also pay taxes on the dividends they receive from the corporation.
A final drawback of a corporation is the sheer amount of time it takes to form and maintain one. Establishing good record-keeping habits can offset this, but you cannot avoid requirements like annual reports, quarterly tax payments, and more. If you can’t tolerate the paperwork, you may want to either hire someone to do it for you or choose a different entity type.
If these drawbacks don’t bother you, then the corporation may be the right entity for you.
Hiring an Incorporation Service
Does this process sound like a hassle? Would you rather pay someone else to incorporate your company while you focus on actually growing your business? Fortunately, there are plenty of reputable incorporation services out there that can provide professional assistance for a mere fraction of a lawyer’s fees.
There are dozens of different companies that offer incorporation services these days, and it can be difficult to discern which of them is your best option. That’s why we put together our comprehensive guide to the top-rated business formation services available online. We encourage all of our readers to check out that guide and choose the right company for your specific situation. In addition, we’ll briefly run down a couple of our favorite options here.
#1 - ZenBusiness
We always appreciate what ZenBusiness has to offer, and they’re our top pick for incorporation services for a reason. First off, ZenBusiness has some of the lowest price points in the industry. In addition, this company includes some valuable features like a full year of registered agent service at no additional cost.
ZenBusiness receives spectacular feedback from its clients, with 6,200+ reviews available online and nearly all of them being positive. Finally, the company also displays tremendous corporate responsibility, as it loans money to women- and minority-owned businesses and partners with Kiva.org to help lift people out of poverty.
#2 - Northwest Registered Agent
You don’t need us to tell you that Northwest’s $39 entry-level price point is a good deal. What does Northwest Registered Agent do that makes them stand out? In short, Northwest has the best customer support we’ve ever experienced in this industry.
While most of its competitors have rather mediocre customer service departments, staffed by outsourced call centers, Northwest has highly trained professionals answering its phones at all times. These experts can help answer many tough questions that competing companies’ support teams won’t have a clue how to answer.
In addition, Northwest also offers its customers a year of registered agent service, just like Incfile and ZenBusiness. However, only Northwest locally scans every document it receives as your agent, while Incfile and ZenBusiness only scan the government forms they’re legally required to scan.
#3 - Incfile
Incfile is one of a very small handful of companies in this industry that will form an LLC or corporation with no service fees. All you need to do is pay your state’s fee and Incfile will take care of everything else. That’s not the only piece of good news we have regarding Incfile’s business formation services though.
Like ZenBusiness, Incfile also receives excellent feedback from its customers, with around 27,000 positive reviews available online and just a few negative reviews.
The main reason we rank Incfile behind ZenBusiness is that Incfile has more third-party offers and upsell attempts than ZenBusiness does. However, if you don’t mind promotional partnerships and upsells, Incfile could be a great fit for your new LLC or corporation.
When Is the Best Time to Incorporate Your Business?
If you’re decided that incorporating your business is the right move, the next question is when you should do it. As we’ve mentioned, the incorporation process can be a hassle, and it can also take quite a bit of time. That said, we think you should form your corporation before you start transacting business with your company.
Why? The explanation all comes back to the personal asset protection afforded by the corporation. If you start your business as a sole proprietorship or general partnership to “ease into” business ownership, you will be entirely liable on a personal level for every transaction you execute. That’s because informal business entities like these do not provide any limited liability protections.
If you incorporate your business before you make your first sale, everything your company does will be protected by the corporate veil (as long as you form and maintain your corporation properly). This protection is absolutely vital for just about any business type, so you should incorporate yours as soon as you’re 100% certain about your business model.
The Real Cost of Incorporating a Business
Another of the most common questions we hear from entrepreneurs is how much it actually costs to incorporate.
There are often additional expenses involved with the incorporation process, other than the fee you pay the state for your formation document filing. It’s important to note that, much like each state charges its own rates for incorporations, the additional costs can vary from state to state (and industry to industry, in some cases) as well.
Let’s quickly break down some of the other potential costs. One that isn’t usually required is a name reservation fee, which is required by law in Alabama but is optional elsewhere. In most states, a name reservation only has a nominal fee — in many, this will only cost you $10-20.
Another variable that can add expenses is whether you choose to use an incorporation service or not, as most of these companies charge their own service fees in addition to the state’s formation fee. Similarly, whether you want a registered agent service will also affect your new corporation’s bottom line. If you opt for assistance from an attorney instead, your expenses will obviously grow.
Then, there’s the issue of initial and annual reports. Initial reports aren’t required in very many states, but they’re a highly important part of the formation process in states that do require them. As for annual reports, most states require them from corporations, and the costs can vary widely, from as little as $10 in Colorado all the way up to a minimum of $300 in Maryland.
Taxes are another variable for corporations. Different states have different corporate tax rates, and some also assess other fees, like franchise taxes. The cost of operating your business will also vary based on whether it’s classified as a C corporation or S corporation.
Frequently Asked Questions
How long does it take to incorporate a business?
The answer to this question varies considerably based on your state of formation. There are some states that have online incorporation portals where you can form a corporation immediately. Meanwhile, some states require you to mail in paper forms that can take a matter of weeks. Additionally, many states offer some sort of expedited service that can dramatically speed up your formation process. For more details, ask your incorporation service or your state’s Secretary of State office.
Should I use an online incorporation service, hire an attorney, or form my own corporation?
All three of these options have their own advantages and disadvantages, depending on your priorities. Forming your own corporation will always be the cheapest option, although it doesn’t involve any professional assistance. On the other end of the spectrum, hiring an attorney can be prohibitively expensive for many startups, although the expert advice you’ll get can make it worthwhile. Finally, an online incorporation service splits the difference, providing professional help while charging a fraction of an attorney’s fees.
Guru Tip: If you’d like to compare some of the top rated incorporation services, see how our favorite options stack up against each other.
What types of bonus features can I expect if I use an incorporation service?
This all depends on which company you choose to form your corporation, and which of its formation packages you opt for. In general, it’s common to see these companies include perks and features like registered agent service, operating agreements, annual report service, binders embossed with your company’s name, and more.
Can I form a corporation with a limited lifespan?
Yes, when you incorporate your business, you will have the option to designate a perpetual lifespan or a specified dissolution date.
Can I form a corporation by myself? Or do I need co-owners?
Although the vast majority of corporations have multiple owners or shareholders, you are welcome to form a one-person corporation if you’d like to.
Do I need to hold regular meetings for my corporation?
Corporations have strict requirements to hold shareholder and board of directors’ meetings on a regular basis, and also to take detailed minutes from those meetings.
What state should I form my corporation in?
This is a bit of a tough question, as different states have different pros and cons for incorporations. For the most part, entrepreneurs tend to form corporations in their home states, and this is typically our recommendation as well. However, there are a few states with distinct advantages that we should briefly discuss.
Delaware is a popular option for incorporations because it doesn’t assess taxes for business transactions performed outside the state. In addition, it has low fees and taxes, as well as an exclusive court system for business matters called the Chancery Court, a feature you won’t find in any other state.
Nevada is another common choice because of its extremely low business taxes. There is no corporate income tax here, making it arguably the cheapest state to run a corporation in. Also, you don’t need to live in Nevada to own and operate a corporation here.
How does limited liability protection work?
The limited liability protections afforded by a corporation are often referred to as the “corporate veil.” This veil provides a layer of separation between your business and personal assets, preventing creditors from pursuing your house, car, personal bank accounts, and more while suing your business. Thanks to the corporate veil, only your business assets are at risk in a lawsuit. However, if you fail to form or maintain your corporation in compliance with state laws, your corporate veil could be “pierced” and you will lose your limited liability protection.
The corporation is such a popular business entity type for a reason, as it combines personal asset protection with the ability for significant growth and expansion.
The result is a rigid and somewhat inflexible business structure, but one with plenty of advantages to offset these hassles.
Still, the point we would like to drive home is that the corporation is not for everyone. While it does have several significant advantages over the LLC (as well as over informal entities), there are also some disadvantages that could apply depending on your exact situation.