How to Form A Corporation

by David Carnes
Even a single businessperson can form a corporation.

Even a single businessperson can form a corporation.

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Forming a corporation allows a business owner to avoid liability for business debts undertaken by the company. A corporation is treated as a legal person in its own right: it can sue and be sued, it must file tax returns, and it can become a shareholder in another corporation. Incorporation laws vary from state to state.

Step 1

Select a business name. In most states, a business name must include a suffix such as "Incorporated," "Corporation," or variations and abbreviations of the suffixes in order to inform the public of its limited liability status.

Step 2

Choose your state of incorporation. You don't have to do business or set up offices in the state to incorporate there. Many corporations choose Delaware because of its advanced corporate law system and the knowledgeable judges that staff its corporations court.

Step 3

Perform a name availability search in your preferred state of incorporation to determine whether any other business entity is using your preferred business name in the state.

Step 4

Nominate directors and a registered agent. Directors must make many of the corporation's important decisions. Some states require more than one director: California requires three, for example, unless there are fewer than three shareholders. The registered agent is the person designated to receive official communications on behalf of the corporation, and must reside in the state of incorporation. Neither the directors nor the registered agent need to be shareholders.

Step 5

Complete the articles of incorporation — the charter that provides basic information about your company and establishes its legal existence — and submit them to the appropriate state agency along with the appropriate filing fee. Many states offer preprinted, fill-in-the-blanks articles of incorporation. Generally, the articles of incorporation must list the name of the corporation, the registered agent's name and address, the number of authorized shares, the par value of the shares and the corporation's business purpose. The par value of the shares can be a nominal value such as $0.01, and the corporation's business purposes may be "any lawful activity."

Step 6

Create corporate bylaws and have every shareholder sign them. Bylaws set forth the corporation's internal organization by establishing rules governing issues such as the naming of officers, the maximum number of directors, the issuance of shares, voting rights, quorums, and shareholders' and directors' meetings. Although bylaws are not legally required and they do not have to be filed with any state authority, they are admissible as evidence in a court of law.

Step 7

Convene an initial shareholders meeting to ratify the corporate bylaws, authorize the issuance of shares, formally appoint directors and the registered agent, and authorize certain people to act on behalf of the corporation with respect to banking matters. Create a written resolution that lists these corporate acts, and record minutes of the meeting.

Step 8

Obtain state and federal taxpayer identification numbers. Online legal document services can help you obtain these. The corporation will need tax ID numbers to open a corporate bank account and file its tax returns.

Step 9

Open a bank account in the name of the corporation. Only persons authorized by the shareholders' meeting should be authorized to perform banking transactions using this account.

Step 10

Issue share certificates in the names of each shareholder. These certificates should include the names and addresses of the respective shareholders, the number of shares owned, their par value and the date of issuance.

Step 11

Create a shareholders' agreement between the corporation and its shareholders that spells out how shares are to be transferred if a shareholder dies, becomes disabled or wishes to dispose of his shares. It may contain a right of first refusal that requires any shareholder wishing to sell his shares to an outsider to first offer them to existing shareholders. It may also contain a "tag-along" provision that allows minority shareholders to sell their shares if majority ownership ever changes hands.

Step 12

Apply for business licenses and permits. These may vary according to the place where the corporation does business and the type of business it does.

Step 13

Secure permission to do business as a "foreign corporation" if the corporation will do business in any state other than its state of incorporation.