FOR LAWYERS

6 Steps to Creating a Corporation

By
Lia Kopin-Green
/
January 8, 2023
Last reviewed by
Boruch Burnham, Esq.
/
June 12, 2023

There are few things more exciting than embarking on the journey of entrepreneurship. Nonetheless, starting your own business can be complicated and involves overcoming various legal hurdles, especially if you intend to form a corporation for your business. Learn more about how to form your corporation with this step-by-step guide.

1. Choose your corporation’s name

Selecting a name is a crucial first step in the process of forming a corporation. Corporation name requirements vary from state to state, but generally it is required that the name is not already in use by another company, in which case it is important to conduct a thorough name search in order to ensure that the name you intend to use for your business is still available. Moreover, your corporation’s name should include the entity identifier such as “Incorporated” or its abbreviation “Inc.”

At this stage, you may want to consider using a trademark or logo to identify your company. Having a trademarked business name can help establish your brand and make it more recognizable to consumers.

2. File articles of incorporation, and, if required in your jurisdiction, articles of association 

The next step is to file articles of incorporation with the state in which you intend to incorporate. In many US states, you will be required to file articles of association (often referred to as “bylaws”) as well. Furthermore, in a number of states both articles must be incorporated into and filed as a single document. Because the terms are often erroneously used interchangeably, they service two distinct purposes, and therefore it is important to understand the distinctions between them. 

Articles of incorporation are used to establish your company as a legal entity and must contain certain essential information about your company. While the particulars vary by jurisdiction, this information generally must include its name, address, as well as those of its incorporators and registered agent, a statement of the corporation’s purpose(s), and its share structure.

On the other hand, articles of association outline the rules and establish internal guidelines for the corporation’s directors, officers, shareholders, employees, and other stakeholders regarding its structure, governance, and operations and describe shareholder rights, conditions and procedures for the appointment and removal of directors, dividend distributions, share transfers and more. It should be noted that even in jurisdictions that do not require the filing of articles of association, companies will usually have them for their own self-governance. 

3. Appoint directors

It is common for the owners to appoint directors when forming a corporation. A director is a person appointed or elected by shareholders to sit on the board of directors in a corporation. Directors have a number of essential responsibilities, including implementing corporate policies and making decisions regarding the management and administration of a company. It should also be noted that in some cases, directors can be accountable for actions committed by agents, officers, employees, and subsidiaries of the corporation.

State regulations tend to vary when it comes to the functions and responsibilities of corporate directors. Thus, it is critical to be informed of applicable state laws when assuming the position of a director and appointing them.

4. Issue stock

In many corporations, stock is issued to help finance the business. The board of directors typically authorizes the issuance of stock, which is later distributed to investors in proportion to their contributions, which can be in the form of assets, cash, or services rendered to the corporation. The number of stocks that can be issued is calculated by determining the number of authorized shares of a company. This information can usually be found in a company’s articles of incorporation. 

There are two main types of stock that may be issued: common stock and preferred stock. Common stock shareholders are typically entitled to receive dividends and vote on important matters that affect the corporation, such as the appointment of directors. On the other hand, preferred stock does not give voting rights to shareholders. Nonetheless, preferred stock shareholders are entitled to receive dividends prior to the common shareholders.

5. Obtain licenses and permits

You may need to obtain various business licenses and permits, depending on the nature of your business and the location in which it will be operating. Common permits and licenses include:

  • Business license: In most cases, a business license is required by the city or county where you are operating your business. You may need to obtain a specialized license from a state or federal regulatory agency in order to engage in certain business activities, such as agriculture or medicine.
  • Sales tax permit: If you plan on selling goods or services that are subject to sales tax, you will need to file for a sales tax permit from your local department of revenue. 
  • Zoning permit: You may need to obtain a zoning permit to ensure that your business location is appropriate for the type of business you are operating. Zoning permits are generally issued by the local government agency responsible for building and planning in your state.

6. Open a corporate bank account

Setting up a corporate bank account that is separate from the bank account of its owners is a crucial step in establishing a corporation. Doing so will, in most instances, help protect your personal funds from any liabilities or debts incurred by your corporation. 

To find the best bank for your corporation, it is recommended that you research various banks and select the one that best meets your business's unique needs and requirements. Once you have chosen a bank, you will typically need to provide basic information about your corporation in order to officially open an account. The bank may ask for your Employer Identification Number (EIN), which can be obtained from the Internal Revenue Service (IRS).

Bottom Line

Once you have completed all of the necessary steps to create your corporation, it’s time to start focusing on the day-to-day operations of running your own company. However, it is essential to keep in mind that even after you have established your corporation, you have ongoing legal obligations as a business owner. This includes tasks such as renewing licenses and paying taxes on a regular basis. 

Looking for legal support to help launch your corporation? Through AAL’s directory, you can find numerous skilled attorneys with extensive experience in practicing business law.

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