How To Form A Corporation [Step-by-Step]
You’ve decided to form a corporation. Or maybe you have an existing LLC that you want to convert to a corporation (in which case you should read this blog post first). Either way, you’ve come to the right place.
The corporation is an entity that’s most often chosen by companies that are or plan to become a public company, and that want to have limited liability for owners/management and a predictable legal structure.
In the past, businesses incorporated mainly to protect shareholders, directors, and officers from exposure to personal liability. But with the advent and rise in popularity of the limited liability company (LLC), which also offers liability protection, businesses have other ways of limiting personal liability.
Still, despite the available alternatives, there are very good reasons for some companies to opt for a corporate structure. Assuming you’re one of those companies, keep reading to learn some of the key steps for forming a for-profit corporation.
C or S?
Your first choice is between the C-corporation and the S-corporation. When you pick between the two, what you’re doing is choosing how the corporation will be taxed.
A C-corporation’s income is taxed twice: (1) at the entity level when earned, and (2) the stockholder level when distributed. Unlike the C-corporation, the income of an S-corporation is not taxed at the entity level. Instead, its profits and losses “pass-through” to stockholders to report, according to their respective share of the company, on their own tax returns.
Although the tax treatment of the C-corporation may make it seem less appealing than the S-corporation, only a certain type of company is eligible for S-corporation status. To meet the requirements of being an S-corporation, a company can have only one class of stock, 100 stockholders or less, and (subject to limited exceptions) only U.S. citizens or residents as stockholders.
Unsurprisingly, given the limitations on S-corporation status, most large and publicly traded corporations are C-corporations. Large businesses that want to raise capital publicly benefit from having unlimited shareholders. They also benefit from having different classes of stock, which allows them to create different distribution and voting rights among shareholders.
Note: Startups who plan to seek private investment capital typically opt for C-corporation status as well.
Pick A State. But Not Just Any State.
After you’ve decided how the corporation will be taxed, you’re ready to pick a state of incorporation. For a number of reasons (some good, others not), Delaware is often chosen.
Note: Delaware is often chosen because it has a well-developed body of corporate law that’s friendly to businesses, as well as low taxes and easy filing and online services.
But if your business is in Washington or Oregon or really anywhere other than Delaware, it’s worth considering whether it would be easier just to incorporate in your home state. After all, a corporation formed in Delaware will have to pay additional fees to register as a foreign entity in Washington.
Then again, if you’re in Washington but have potential investors in New York, they may insist that you incorporate in Delaware, as their attorneys will be most familiar with that state’s body of corporate law. The takeaway here is that what seemed like a simple choice may actually require a fair bit of planning and strategy.
Pick A Name. But Not Just Any Name.
Next, you’ll want to choose a name for the corporation. But before you rush to order custom letterhead, you’ll want to determine whether the name is available in your state of formation and in any other states where your corporation may qualify to do business. In Washington, you can see if your chosen name is available on the secretary of state’s website.
Tip: If you’re not ready to register yet, but you want to reserve your name, you can do so for a 6-month period by filing an application with the secretary of state.
You’ll also want to decide whether the name will be used as a separate domain name, trademark, or service mark. If so, you should consider running a separate search see if there are similar names already in the marketplace.
You should also always make sure the name meets any statutory requirements in the state you’ve chosen. In Washington, a corporation has to contain one of the following names (or its abbreviation):
On the other hand, your name can’t contain certain words or phrases, including “bank” or “trust” or “cooperative.” Click here for a list of additional words that can’t be included in your name.
Draft the Articles of Incorporation
Next, you’ll need to prepare the articles of incorporation in your state. Washington has a form that helps explain what content must be in the articles, which includes the following:
The number of shares and the classes of shares authorized;
The address of the initial registered office and initial registered agent; and
The name and address of each incorporator (incorporators execute the articles and deliver them to the secretary of state for filing; while they’re often attorneys, they don’t have to be).
While the content above must be included in the articles if you are incorporating in Washington, there are optional provisions that can, but need not be, included for Washington, like the following:
The par value of stock shares.
The terms for a staggered board of directors.
Eliminating or restricting a director’s personal liability to the corporation or its shareholders.
Note that there are a number of “default provisions” contained in Washington’s Business Corporation Act, which can be found here, and these provisions will apply unless the articles provide otherwise. To ensure you don’t mistakenly subject your corporation to one or more of these default provisions, it’s smart to consult with an attorney on what the default provisions mean and how they could negatively affect your corporation.
For instance, you may want to prevent shareholders from having preemptive rights, in which case you would have to do so in the articles of incorporation if you’re in Washington. The same is true if you want to prevent cumulative voting by shareholders for directors. If you’re not sure about how to handle these issues, you may want to consult with an attorney.
File The Articles of Incorporation
Once the articles have been drafted, it’s time to file. In Washington, the articles can be filed online, by mail, or in person. Filing should be handled by the incorporator(s), a role that is often handled by an attorney.
In Washington, the current filing fee is $180, though there is an additional $20 fee to file online, which is probably worth paying simply for the convenience.
Draft The Bylaws
Finally, you should have an attorney draft the corporate bylaws. While bylaws are not filed with the secretary of state, they are a crucial component of forming a corporation because they set out the rules that will govern how the corporation operates (unless they conflict with the articles of incorporation, which trump the bylaws).
The bylaws can cover a range of topics, but the common ones include the following:
Issuing and transferring stock share certificates.
Establishing corporate officers and committees.
Holding meetings of shareholders and directors.
Electing, removing, and compensating directors and officers.
Once the bylaws have been drafted, they should be formally adopted by the incorporator(s) or the board of directors.
Incorporating your business can seem like a daunting task. But it’s manageable, especially if you have legal help for things like drafting the articles of incorporation and the bylaws. Contact us for a free consultation if you’re considering incorporation.