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Forming a new corporation requires some careful planning and a number of key steps. Here is a checklist of some of the important issues to address.
1. Choose a corporate name: A corporate name is generally made up of three parts: "distinctive element", "descriptive element" and a legal ending. All corporations MUST have a distinctive element and a legal ending to their names. Some corporations choose not to have a descriptive element. In the name "Callaway Cabinetry Inc." the word "Callaway" is the distinctive element; the word "Cabinetry" is the descriptive element; and the "Inc." is the legal ending. The legal ending indicates that it is in fact a legal corporation and not just a business registration or partnership. You can choose from the following words: Incorporated, Limited and Corporation, or their respective abbreviations: Inc., Ltd. and Corp.
Choosing a corporation name is not easy because many names are already taken and some names have trademark issues associated with them. Check out if the name is available from the Secretary of State of your state. Then do an Internet search and trademark search online to make sure someone is not already using the name.
2. Decide in what state to incorporate: Some companies decide to form their corporations in states that do not have corporate income tax such as Nevada or Delaware. If you do decide to incorporate in another state then you will have to apply for a certificate of authority as a foreign corporation in the corporation's state of operation. You will most likely decide that the state that you will reside in will be the place to incorporate.
3. Start preparing the incorporation documents: This will usually mean preparing the Certificate of Incorporation, the Bylaws (which outline a number of important corporate housekeeping details such as when annual shareholder meetings will be held, who can vote and the manner in which shareholders will be notified if there is need for an additional "special" meeting), the Resolutions of the Board of Directors, the Stockholder Resolutions, the Stock Ledger, Stock Certificates and more. You can find sample forms on the Internet.
4. File the Certificate of Incorporation with the Secretary of State. You fill in blanks in a preprinted form (available from commercial publishers or your state's corporate filing office) listing the purpose of your corporation, its principal place of business and the number and type of shares of stock. You'll file this Certificate of Incorporation (also called a Charter, Articles of Incorporation or Letters Patent) with the Secretary of State or your state's corporate filing office. There is a registration fee.
After your articles are filed, your corporation must hold an organizational meeting where bylaws are adopted and the incorporation process is completed. Share certificates should be distributed to shareholders and these transactions should be recorded on the corporation's stock ledger. All of this information should be kept in a corporate record book.
5. Determine the right capitalization for the corporation: You want to make sure that you have adequately capitalized the company to ensure its success. Consider the capital needs of the company through a well thought out business plan and financial projections.
6. Issue stock to the shareholders and comply with securities laws: When you sell stock to shareholders, you have to comply with state and federal securities laws. Shares represent the ownership of your corporation and not its size. It is a common misconception that if you authorize 1,000,000 shares with a par value of $1.00 per share then your Corporation will be worth $1,000,000. This is not so. When authorizing the amount of shares you are basically telling the state how you want your corporation's ownership to be divided. A very common amount for small businesses to authorize is 1,500 shares with a par value of $1.00 per share. This means that your corporation has the authority to issue 1,500 shares at a minimum of $1.00 per share. A good corporate lawyer can help you navigate through the stock issuance process.
7. If you have more than one shareholder, think about whether you should have a Shareholder Agreement or Buy-Sell Agreement: These types of agreements provide what the shareholders are required to do for the business and for rights of first refusal on transfer of their shares.
8. Make sure you have a Corporate Minute Book: Various corporate actions require proper documentation, such as minutes or consents of the Board of Directors and shareholders. You should set up a Corporate Minute Book and keep the records in that book.
9. Elect the Officers and Directors of the Corporation: The directors manage the business and affairs of a corporation and are appointed by the corporation's shareholders. Officers are appointed by the board of directors and are responsible for the daily operation of the corporation. Common officer titles are CEO (Chief Executive Officer) or president, vice president, secretary and treasurer. Often with small businesses, one person will act as shareholder, director and officer. In almost all states, only one director and/or officer is required. Typically, one person can hold multiple officer positions.
10. Obtain your Federal Tax ID number: Also known as an Employer Identification Number (EIN) or a "95 number" this number is assigned to your corporation by the federal government for taxation purposes. Most banks require that a corporation or L.L.C. obtain a Federal Tax Identification Number as a prerequisite to opening a bank account regardless of whether the company will have employees. Think of it as a social security number for your business. You can get the federal form by going to the IRS Web site.
11. Determine if you need any special licenses for your business: State, federal or local rules may require your business to get a special business license or permit.
12. Set up a corporate bank account: You need to treat your corporation as a separate entity with its own bank accounts and records.
13. If you are going to hire employees, make sure that you have all the proper forms and agreements for them: These forms might include an employee "at will" employment letter (saying either the employer or the employee can terminate the relationship at any time), a Confidentiality and Invention Assignment Agreement (ensuring that whatever they develop in connection with their job is owned by the corporation) and an Employment Application (requiring the employee to give you relevant information as a condition to hiring them). Samples of these forms can be found on the Internet.
14. Decide if you should elect to be an S corporation: An S Corporation is a standard business corporation that has elected a special tax status with the IRS. This tax treatment allows the corporation not to be a separately taxable entity. Instead, the income of the corporation is treated like the income of a partnership or sole proprietorship; the income is "passed-through" to the shareholders. Thus, shareholders' individual tax returns report the income or loss generated by an S corporation. To be classified as an S corporation, a corporation must make a timely filing with the IRS.
Of course, your particular business may require additional steps to be followed, and consultation with your lawyer and accountant may be appropriate.
After the corporation is formally established, it must remain financially and legally separate from any of its shareholders in order to preserve the benefits and protections of corporate legal status. Maintain healthy business procedures like keeping specific records and accounts, filing necessary government documents and holding regular shareholder meetings or getting written consents or waivers by directors and shareholders.
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