The most efficient way to form a corporation in the U.S.

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Photo Credit: Kittiphan

The United States Census Bureau announced that it has received 52,151 business applications to form corporations for July 2021. This indicates a 1.2% increase in application volumes from the previous month. The Census Bureau projects that 33,712 new business startups with payroll tax liabilities will form within 4 quarters of application from all the business applications filed during July. A total of 454,460 business applications were received. The strengthening economy has nurtured many opportunities for entrepreneurs, with the number of corporations and small businesses on the rise. In this renewed economic climate, many entrepreneurs may choose to form corporations, as this business type provides entrepreneurs with a formal business structure and liability protection.

Understanding the corporation

Understanding what a corporation is forms a crucial step when looking at how to create a corporation. As a unique entity the corporation allows a group of people to operate a business together. The entity itself enjoys corporate personhood, giving the corporation many of the same rights as a person. This means that in the eyes of the law a corporation is seen as an individual that is able to purchase assets, sue or be sued and hire employees. Adding to their uniqueness, corporations are the only entity type that can issue stock. Stocks are owned by shareholders and in essence shareholders are owners of the corporation. The biggest advantage of a corporation is the potential to raise funds by issuing stock.

Forming a corporation grants some important legal protection. Due to the corporation being considered as a separate legal entity members cannot be held liable for the corporation’s debt, unless the business is not maintained correctly. The corporation will also remain unaffected if a member goes bankrupt.

How to create a corporation

Forming a corporation involves several steps as well as the payment of registration fees. These steps in brief are:

Choosing and reserving a name

Regardless of the state the business entity is incorporated in, the business name needs to be unique and cannot be too similar to any names already in use. It is worth taking note of restricted words (bank, insurance) that are only available to businesses operating in those industries. Reserving the business name will protect it for a fixed period while preparations are being made to get the corporation up and running.

Filing articles of incorporation

The corporation is not officially formed until the appropriate incorporation documents are filed with the Secretary of State. In most states the document in question is referred to as articles of incorporation. The state then issues a Certificate of Incorporation. This certificate legally entitles a corporation to operate as a business within the state. Articles of incorporation describe both the purpose of the corporation as well as the share structure.

First meeting with the board of directors

The first meeting with the board of directors will help to set the tone for future business endeavors. It is advisable to discuss key business features, setting up stock and shareholder agreements and appointing personnel to manage daily business affairs.

Tax registration

Taxes form a vital part when operating a compliant business. Business owners will need to register for taxes on both state and federal levels. Most corporations will need to pay federal and state corporate income tax, but there are some exceptions. Nevada, Ohio, Texas and Washington impose gross receipt taxes instead of corporate income taxes. South Dakota and Wyoming are the only states that do not levy a corporate income or gross receipts tax.

Obtaining business licenses

Some businesses will need to acquire a license in order to operate properly. Typically businesses involved in agriculture will need to obtain a license from the U.S Department of Agriculture, but many other industries require licensing as well. It is best to consult the Small Business Administration for licensing information.

Open a business bank account

A business bank account will help to keep the corporation’s finances separate from any personal finances. United States banks have eased their lending standards in both consumer loans and corporate loans to small companies, according to analysts at UBS. This could ensure that small companies obtain financing through banks much easier.

Maintaining the corporation

Once the formation process has been completed, there are a few more issues that need to be addressed which can help the corporation run smoothly and legally. Taxes will need to be paid annually. In addition to taxes, most states will require an annual report for the business to be filed. This report gives the state a snapshot of the corporation’s activities for the year. Keeping a detailed record of all business activities (including meeting minutes) are vital in ensuring that a corporation remains compliant. Fortunately services like Incorporation Rocket are available to help entrepreneurs navigate the red tape of how to form a corporation.

Story by Giuliana Speranza


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