How Does Formed Help Me?
At Formed.com, we will file your corporate formation documents with the state the same day you order and provide all necessary statutory services as well as provide you with all the necessary supporting documentation required to form your new corporation. But forming a corporation isn’t just about the paperwork. Of course documents need to be filed, forms need to be signed, but in order to truly form a corporation, you need to understand how a corporation works and all of the underlying functions and duties.
We will form your corporation and everything you need to launch your new venture, however, it’s up to you to bring your corporation to life.
Below, you’ll find all the information you need to understand what a corporation is, how it functions, and the pros and cons of forming a corporation. Or you can get started now:
How To Form a Corporation
The US constitution does not make any mention of the formation or use of corporations. Corporations are governed by the states and each state has its own statutes concerning corporations. Each state has its own requirements for forming a corporation. In general, the rules are congruent with each other and have similar requirements.
To form a corporation, you must file Articles of Incorporation (or similarly named formation documents) with the state’s Secretary of State or Corporations Division. Each state charges a filing fee averaging around $100. In many states, you can file Articles of Incorporation online.
While specific Articles of Incorporation requirements vary by state, in general, you’ll need to include the following information:
- Business NameSimply list the desired business name. Every state has an online name search database. If the name is not already in use, you can use it. You will also need to include a corporate name ending like “Inc.” orNumber of Authorized Shares and Par Value: “Incorporated.” There is no need to reserve the corporation’s name, unless you will not be forming your corporation immediately and want to make sure the name is available at a future date.
- Business AddressList physical address and mailing address if separate.
- Registered Agent Name and AddressYour registered agent is the corporation’s official point of contact. Since the corporation has all the rights of an individual but is unable to communicate and receive communications, every state requires that you appoint a registered agent to do so on behalf of the corporation. If you hire Formed.com to form your corporation, we automatically provide a year of registered agent service for your corporation. We can also list our registered agent address for your business address for added personal security.
- Name and Addresses of DirectorsA corporation has a unique management structure made of shareholders, directors, and officers. Shareholders (owners) appoint the directors. The directors manage and direct the overall mission of the corporation. The directors appoint the officers (president, secretary, treasurer, etc.) who then oversee the day-to-day operations of the corporation. In startup corporations, the initial directors tend to be the initial shareholders.
- Number of Authorized Shares and Par ValueYou will be required to list the number of authorized shares. Most people try to keep the number simple and easily divisible (often 1000 shares). And the par value is the minimum price at which the shares could be sold. Some people like to have fun with the numbers initially authorizing millions of shares, but be careful because your state may base the filing fee and annual taxes on number of authorized shares or stock par value.
- Name and Address of IncorporatorThe Incorporator is merely the person authorized to form your corporation. If you hire Formed to form your corporation, we would be listed as the incorporator.
After completing the Articles of Incorporation, submit the filing to the state. Your state may have expedite fees if filing times are slow. Most states with online formation capabilities will file and activate your corporation immediately. Once you complete these steps, your corporation will be formed.
Corporation Definitions and Terminology
When forming a corporation for the first time, encountering technical, legal language is unavoidable. That’s why many people end up hiring companies like Formed.com to form their corporation on their behalf. However, we think its important that you understand this technical language and how it applies to your corporation.
- Annual ReportTo maintain your corporation and keep it in good standing, you will need to file an annual report or franchise tax with your state. Requirements vary by state, and some states have biennial reports or even decennial reports (Pennsylvania). In most states these reports are merely a verification of simple facts about the corporation and a filing fee, though, some states like Texas and Maryland require financial information and more intensive annual reports. In most states, you can file annual reports online. Due dates vary, however, most are based on the original incorporation date.
- Annual MeetingsOne of the more unattractive features of a corporation are the corporate formalities. To maintain a firm veil of limited liability and ensure the corporation is operating apart from the owner’s, the corporation has to follow certain protocols. Annual meetings are one part of those. What’s covered in the meetings will vary by corporation and state requirements, however, what’s most important is that the secretary or assigned person track and keep annual meeting minutes, listing overview and date of annual meetings. Annual meeting requirements should be thoroughly outlined in the corporation’s bylaws. Please note that we include annual meeting minutes templates in our Formed incorporation package, ensuring that you have everything you need to maintain your corporation.
- Articles of IncorporationThe formation documents filed with your state to form your corporation.
- BylawsWhile often overshadowed by the Articles of Incorporation on webpages about how to form a corporation, the bylaws of a corporation are infinitely more important in the long term. Bylaws outline and define the rules of the corporation. Corporate bylaws show how profits and losses will be distributed to shareholders; the roles of directors and officers; the corporate bylaws are the skeleton and circulatory system of your corporation. While they are not required by law in every state, every successful corporation will have adopted corporate bylaws, and the adoption of corporate bylaws is often the first task assigned to the directors at the corporation’s initial director’s meeting. For no additional cost, Formed.com includes a corporate bylaws template that can be adopted by your corporation, potentially saving you thousands in attorney fees.
- C-corpC-corp refers to a corporation’s default tax structure. The corporation will pay tax on its profits according to state and federal corporate tax rates. Then once the profits are distributed to the shareholders, the shareholders will pay personal income tax on their individual share of the profits.
- DirectorsAppointed by the corporation’s shareholders, the directors will make high-level decisions about the corporation and fulfill the roles laid out in the corporate bylaws. Directors typically appoint the officers.
- EINThis goes by many names: Employer Identification Number (EIN), Federal Employer Identification Number (FEIN), Tax Identification Number, etc. No matter what you call it, this number is essentially your corporation’s social security number. It’s how the
- Limited LiabilityThis term refers to the legal separation and distinction between a corporation and the shareholders. The corporation is independent of the shareholders and the corporation can own and hold property. Limited liability is what allows the corporation to be sued and not let the shareholder’s personal assets be at stake.
- IncorporatorThe person authorized to form the corporation.
- OfficersRoles such as a president, CEO, CFO, secretary, treasurer, etc. These are a corporation’s officers. They oversee the corporation’s day-to-day operations and tasks assigned by the board of directors.
- Par ValueThe value set on the corporation’s stock when the corporation is incorporated. This is typically a very low number ($0.01) or no number at all.
- PrivateThis refers to the status of the corporation’s ownership. Private means that the company’s stock is not openly sold and traded. Private companies typically have only a few owners and are tightly controlled.
- PublicPublic corporation’s stock is openly sold and traded on the stock market. It means anyone can buy ownership stake (stock) and then be entitled to a share of the company’s profits or losses.
- ResolutionWhen the director’s or shareholders make a decision, sometimes even small one like deciding to open a bank account, the decision to do so must follow a decorum to maintain the separation between the owners and the corporation. When a decision is made, following the protocols laid out in the corporation’s bylaws, the decision will be recorded as a resolution. The resolution is recorded and kept, similar to meeting minutes.
- S-corpS-corp status is a tax designation that corporations and LLCs can elect by filing a form with the IRS. This dramatically changes a corporation’s tax structure, as an S-corp does not pay corporate tax. The profits pass directly to the shareholders, who then pay personal income taxes on their share of the profits. S-corps also retain the ability to pay out dividends to shareholders, however, they are required to pay salaries possibly negating some tax savings abilities. S-corp status does not fundamentally alter any corporate formalities within the corporation, as all protocols laid out in the corporate bylaws must be followed. S-corp status also restricts the number of shareholders and doesn’t allow non-US citizen shareholders.
- ShareholderOwner of a corporation. Percentage of ownership denoted by the number of stocks the shareholder owns.
How Does A Corporation Work?
The function of a corporation is to be a single entity through which multiple individuals can pool resources to do business. But actually describing how a corporation works requires a layered answer.
- Corporation Formation ProcessOnce you complete the Articles of Incorporation, this document is filed with the state. The state then records the filing, making the corporation an active entity ready to do business.
- Internal Corporation SetupAfter the corporation has been legally formed, the directors, who were appointed by the initial shareholders, need to hold a meeting. At the first director’s meeting, the directors need to complete several tasks including adopt corporate bylaws, appoint officers, make a resolution to open a bank account, obtain an EIN, etc. At this initial meeting, the directors will assign duties and the general shape will be given to the corporation’s day-to-day activities.
- Corporation Formation LogisticsAfter the bank account has been opened, the EIN obtained, and officers appointed, the real work begins. The corporation will commence doing business. For example, if the corporation’s purpose is to sell shoes, the corporation will start selling shoes. The initial capital earned from the selling of stock to the initial shareholders will be spent on inventory. The officers will oversee the daily business of selling the inventory. As profits come in, they will be deposited in the corporation’s bank account. Accounts should be balanced by the person in charge of accounting, taking care to balance what’s spent versus what’s earned. If the corporation ever requires additional funding, the directors and shareholders can vote to authorize more shares and sell a percentage of the company to investors.
- Distribution of ProfitsAfter accumulating profits, the corporation (if taxed as a C-corp) will be taxed on its net profit. The directors will decide whether to distribute what’s left after taxes to the shareholders or to keep the profits and invest in the corporation. Depending on corporate bylaws, the corporation can decide to hold profits for an indefinite period of time before dispersing funds, known as dividends, to the shareholders. Once dispersed, the shareholders will pay personal income taxes on their share of the profits. This cycle will repeat itself throughout the life of the corporation.
- Corporate MaintenanceThe state where you form your corporation will have set maintenance requirements for your corporation. Most states have annual reports. These reports serve as a way update the state corporate database, which tracks the standing of businesses (good standing, inactive, active, etc.), as well as bring revenue to the states. The corporation will complete the annual report and submit it to the state. Additionally, the directors and shareholders must meet on a semi-regular basis, or as required by state law. At these meetings, directors and shareholders will vote on resolutions to transform and alter the corporation as needed. This cycle will repeat itself throughout the life of the corporation.
This is essentially how a corporation works.
|Advantages and Disadvantages of Forming a Corporation
|Ease of Raising Capital
|Ability to Invest in Business
|Stock Options for Employees
Forming a Corporation FAQ
How Do I Maintain a Corporation?
Corporations have two levels of maintenance: state-level and internal maintenance. On the state level, you will need to file reports with your state as required. Notices and due dates will be sent to your registered agent.
Internally, directors and shareholders must meet as required by corporate bylaws and state statutes, and be sure to record minutes and resolutions when altering the corporation in any way.
At Formed.com, we’ll provide you will all templates necessary to maintain a corporation as well as provide annual report reminders and filing tips to ensure maintaining your corporation is as simple as possible.
Where’s the Best State to Form a Corporation?
In some ways, this is a trick question. Because of a variety of factors surrounding taxation, most often the state where you live is the best place to form a corporation. If you were to form a corporation in Delaware, but you live in California, California will likely require you to register as a foreign corporation in California, and negate many of the benefits of being incorporated in Delaware. That means more startup costs, additional maintenance, and more tax filings.
However, if you’re a non-US citizen or you have an online company with no employees, you can choose which state offers the most advantages.
Top 3 States To Incorporate In
- Delaware: Delaware should be at the top of the list for almost anyone forming a corporation. Why? Delaware has a legal system to deal purely with legal disputes and the state offers attractive tax savings for corporate conglomerates. That’s why the majority of Fortune 500 companies are incorporated in Delaware.
- Wyoming: No corporate income tax. No personal income tax. Strong business asset protection laws. Business-friendly legislation. It’s hard to beat Wyoming.
- Alaska: It’s a hidden gem in the US. Alaska has some of the strongest asset protection statutes for corporations, and the tax benefits are hard to beat.
How Do I Do Business in a New State With My Corporation?
Anytime you begin doing business in a new state, you must register to do business in that state as a foreign corporation. Foreign corporation simply means you’re operating in a state other than the state where you originally incorporated. The process to register to do business in a new state with a corporation is similar to the incorporation process. You file what is essentially new formation documents with that state, get another registered agent and services required to maintain good standing. You will also be required to pay taxes on profits gained from doing business in the new state and file annual reports with that state.