How to Incorporate a Business
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Incorporation is the process of registering your business as a corporation. Incorporating a business will differ based on which state you’re doing business in, and whether you’re launching a brand-new corporation or converting another business entity to a corporation.
S-corporations and C-corporations are the two main types of corporations. You can switch from a C-corp to an S-corp and vice versa at any time in your business’s life, but ideally, you should know which structure you want to use when incorporating. C-corporations, the most popular, are taxed once at the company level, and distributions of profits (aka dividends) to shareholders are taxed again on shareholders’ personal tax returns. For S-corporations, profits and losses pass through to an owner’s personal tax return and are taxed at their personal income tax rate.
A typical incorporation takes one to six weeks and costs $100 to $500, depending on where your company is located.
Step 1: Comply with licensing and zoning laws
Before you can incorporate your business, you should first make sure you’re in the clear with local business licensing and zoning authorities. Although most businesses actually don’t need any permits or licenses to operate, those in regulated industries like food service or child care do. Make sure you’re in compliance with local laws so you don’t have to worry about that once you establish your corporation and begin running your business.
Step 2: Conduct a business name search
Next up is to make sure you choose a unique name for your business. Your local Secretary of State won’t allow you to use the exact same name as another corporation in your locality because that could confuse consumers. In addition, choosing the same name as another business could amount to trademark infringement, landing you in legal hot water. As a corporation, keep in mind that you’ll have to tag a signifier onto the end of your business’s name, such as "Inc.," "Co.," or "Corp."
Most Secretary of State offices host online name search directories where you can type in your business’s intended name and ensure that it’s available. If your business’s name is available, some states will even allow you to fill out a form to “reserve” it for 60 to 120 days while you complete the rest of the incorporation process.
Step 3: Name a registered agent
A registered agent is a person or company that will accept official mail on your business’s behalf. When you establish a corporation, your state will require you to name a local registered agent so someone can receive service of process (if the business is sued) and other official paperwork for your business.
If you have a business attorney, they can serve as your registered agent as long as they have an office in the state of incorporation. A director, officer or employee of the corporation can also serve as registered agent if they reside in the state of incorporation. If they move out of the state, you’ll have to choose a new agent. Alternatively, online legal services charge a yearly fee to serve as your registered agent.
Step 4: Draft articles of incorporation
The articles of incorporation are a set of documents you have to file with the state to create a corporation. They contains the business’s name and location, number and type of shares, name and address of the registered agent and name of the incorporator (you, your attorney or an employee of an online legal service).
Some states require additional information, such as:
Explanation of the corporation’s purpose.
Names and addresses of the people who’ll serve on the board of directors.
Names and addresses of the officers of the corporation.
How long the corporation will last (it usually lasts forever).
You can usually find and complete the articles of incorporation on your Secretary of State's website. Many online legal companies have fill-in-the-blank articles of incorporation that you can complete and print out on their website for a fee. This can be helpful because the program walks you through each section of the articles.
Step 5: File articles of incorporation with the state
Once you’ve drafted and reviewed your articles of incorporation, you’ll need to file them with the state. Expect to pay a filing fee of around $100 to $500 at this stage. You can go directly through your Secretary of State's website and follow the filing procedures described there, but if it’s easier for you, you can use an online incorporation service. These companies will help you draft the articles of incorporation and file it for you for a fee. Their fees usually range from $50 to $100.
Step 6: Write up corporate bylaws
Your corporate bylaws are a document that lays out how your corporation is structured and managed. It contains information about shares, voting rights, shareholder and board meetings and how to replace board members and officers.
Additional information that might go into the bylaws include:
Number and type of shares that the corporation can issue (if the corporation will issue stock).
Information about shareholder meetings, board meetings and the annual meeting that every corporation has to hold.
How the corporation will approve loans, contracts, venture capital and other transactions.
Frequency and procedure for financial audits and inspection of corporate records.
Fiscal year of the corporation for tax and bookkeeping purposes.
Procedure for amending the articles of incorporation and bylaws.
Corporate bylaws are typically much longer and more detailed than the articles of incorporation. Although most states don’t require you to file your bylaws, you should keep them safe with your corporate records because you might need to disclose them if you’re audited, need a business loan or want to raise money from investors.
Step 7: Start a corporate records book
A corporate records book is where you store documents to show the state that you’re operating in compliance with the IRS and state laws for corporations. These are some of the main documents you’ll need to include in your corporate records:
Copy of the articles of incorporation.
Copy of the corporate bylaws.
Minutes of shareholder, board and annual meetings.
Stock transactions.
Annual reports.
Business loan documents.
Copies of contracts that the company enters into.
Commercial real estate transactions that the company participates in.
Even though it’s referred to as a corporate records “book,” it’s completely fine to store your records securely in the cloud or on your computer — in fact, online storage is probably safer from loss and theft. The records just need to be somewhere you can easily produce them if your business gets audited.
Step 8: Hold your first board meeting
Once you file your paperwork and begin storing corporate records, you’re almost a corporation. But, before you can officially open for business, you have to hold your first board meeting. As with future board meetings, keep a record of the initial meeting’s minutes.
During this meeting, the board members will:
Formally adopt the articles of incorporations and bylaws.
Decide on the corporate seal.
Authorize and issue shares of stock to the initial set of shareholders (sometimes called “capitalizing a corporation”). The issuance of stock is subject to complicated securities laws, so it’s wise to consult a securities lawyer here.
Officially elect officers such as the CEO, CFO and others
Step 9: Complete additional federal and state requirements
There are some final housekeeping measures before you can officially call your business a corporation:
Apply for an employer identification number, or EIN, for free on the IRS website. Corporations must have an EIN.
Open a business bank account. As a registered business entity, it’s important to keep personal and business finances separate.
Pay your first tax payment. Federal corporate taxes are due on a quarterly basis, and state tax laws differ from state to state.
A handful of states, including Georgia, Pennsylvania, Nebraska and Arizona, have notice requirements for corporations, which means you have to announce the creation of the corporation in a newspaper for several weeks.
Creating a corporation isn’t a one-and-done kind of thing. States often have additional rules that you have to follow to maintain your business’s corporation status. For instance, you usually have to pay an annual fee or file an annual report.
Step 10: File IRS Form 2553 (only for S-corps)
If you’re electing to structure your business as an S-corporation, there’s a 10th step to follow — filing IRS form 2553-Election by a small business corporation. You must file this form within 75 days of incorporating your business for the election to take effect that year. Alternatively, you can file in the year preceding when you want the election to take effect.
Note that you cannot file this form online; you have to either fill it out and mail it in or fax it to the IRS.
This is the information you’ll be asked to provide in the form:
Basic business information, such as name and address.
EIN.
State and date of incorporation.
Shareholder information.
Business’s fiscal year.
Date you want the S-corp election to be effective.
Converting from another business entity to a corporation
Many companies that start out as sole proprietorships or partnerships decide to convert to corporations when they start making more money or need to apply for funding.
To switch from a sole proprietorship or partnership to a corporation, follow the steps outlined above. The only additional things you’ll have to do are dissolve your “doing business as” trade name, if you have one, and switch over all paperwork and accounts into your new corporation’s name. Also, sole proprietorships and partnerships have to get a new EIN when they incorporate.
Converting from an LLC to a corporation is more complicated because you are fundamentally changing the ownership structure of the business. It can be beneficial to get an attorney’s help here.
Although the methods will vary by state, there are three main ways to convert an LLC to a corporation:
Statutory conversion (easiest) - Get all LLC members to approve a certificate of conversion and file it with the state, along with other required paperwork, such as the LLC articles of organization.
Statutory merger (medium) - Have the LLC members form a new corporation and formally exchange their membership rights for shares of stock in the corporation. You’ll have to formally dissolve the LLC.
Nonstatutory conversion (hardest) - Form a new corporation and draft legal agreements providing for the exchange of LLC membership rights for shares and for the transfer of the LLC’s debts and liabilities to the corporation.
Keep in mind that incorporation is regulated at the state and city level, so you’ll want to be aware of local requirements. Whenever in doubt, you can get state-specific help either by consulting a business lawyer or, for general advice, by contacting your Secretary of State office.
» MORE: LLC vs. corporation
This article originally appeared on Fundera, a subsidiary of NerdWallet.
