Many people are launching their own businesses; according to studies, 427,842 business applications were submitted in August 2021 alone. A popular business model chosen by entrepreneurs is the Corporation Formation.
Below we will discuss the steps to starting a corporation as well as the legal requirements. But first we will get started by defining what a corporation is.
A corporation, according to the law, is a separate and distinct entity from its shareholders (owners). A company can have its own assets, obligations, and legal rights, allowing its stockholders to be protected from personal liability.
A company has the ability to sue, be sued, possess and sell property, and sell stock ownership rights. Because capital and ownership are raised and handled through stocks, it is easier to transfer ownership and raise capital as a corporation, in addition to the liability protection.
Corporation Formation Steps
It’s worth noting that each U.S. state has its own set of rules for forming a business, so yours may change significantly. Check the exact criteria for the state in which your company will operate, but these are the essential steps that most firms must take:
- Employ the services of a transactional lawyer.
An attorney can guide you through the process of forming a business. Because corporate formation and governance regulations differ by state and are continuously changing, an experienced attorney can help you navigate the process and avoid problems.
- Fill out the articles of incorporation and appoint a registered agent.
In the state where the articles of incorporation are filed, every corporation must have a registered agent. If your corporation is a party to a legal action, this is the person or company (i.e., registered corporate agent) who will accept the requisite notice, commonly known as service of process. This agent must live in the same state as you did when you filed.
- Establish the corporate bylaws and appoint the board of directors.
The corporation’s bylaws are the rules and internal regulations under which it will operate (similar to an operating agreement for an LLC). Corporations are not required to have bylaws in some states. Corporate bylaws, on the other hand, are a good idea since they define the rights and obligations of your company’s shareholders, directors, and officials, reducing misunderstanding and maintaining corporate formality.
- Make a stock offering.
Shareholders who provide cash, services, or other property to the company are entitled to stock (ownership stake) in proportion to their contribution. A share of stock is categorized as a security, and it is subject to state and federal securities regulations.
- Any other required documentation should be filed with your local secretary of state.
The filing requirements differ by state, with some states not requiring a statement or report to be filed until the next calendar year.
- Fill out any IRS forms that are required.
Every business must obtain an employment identification number (EIN). This is the corporation’s equivalent of a Social Security number, and you’ll use it when opening bank accounts and filing corporate taxes. In most cases, filing by mail takes 30 days, but you may apply for an EIN online and get one virtually instantly.
The filing of the Articles of Incorporation, which is a legal document that proves your firm exists and is authorized to operate in the state, is the most important step in founding a corporation. The following information will be included in a suitable Articles of Incorporation document:
- The name of the company.
- The location of the company.
- Name and address of the corporation’s registered agent.
- Purpose of corporation.
- Stock information, such as the number of shares, their class, and their potential worth.
- Other information as mandated by state legislation, which varies by state.
Failure To Meet Legal Requirements
The following repercussions may occur if a corporation fails to meet its corporate obligations:
- Officers, stockholders, and directors are personally liable for the corporation’s actions.
- It is impossible to file civil lawsuits.
- For nonpayment of its tax duties, the corporation is subject to tax liens.
- Loans or capital investments are difficult to come by.
- Other punishments, such as fines, may be imposed.
- The status of a corporation is suspended or completely revoked.
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Because the consequences of failing to meet corporate obligations can be severe, and the requirements for meeting them vary depending on a corporation’s business situation, it is recommended that those considering forming a corporation seek expert legal advice to ensure that all legal obligations are met.
Starting a corporation is a very lucrative business structure for entrepreneurs. It is very important to stay compliant with the law when forming a corporation. It is suggested that entrepreneurs seek legal help when starting this venture.