Basic Steps to Forming a Corporation

If you're looking into forming a corporation, here are the steps involved.

The life of a corporation begins upon the filing of articles of incorporation with the secretary of state's office. Prior to filing the articles of incorporation, the following issues should be considered.

1. Decide Where to Form Your Company

You can incorporate in any of the 50 states. Many people choose to incorporate in their home state. Doing so may save you money because corporations are required to register as a "foreign corporation" in each state where they do business outside of their state of incorporation, and there is often no need to pay another person to serve as the registered agent. For example, a Delaware corporation that has its main business office in Texas must register as a "foreign corporation" with the Texas Secretary of State and must have a registered agent in Delaware.

However, if your home state has a high corporate income tax or high state fee, and your corporation will not "do business" in the home state, it may be wise to incorporate elsewhere. "Doing business" means more than just selling products or making passive investments in that state. It usually requires occupying an office or otherwise having an active business presence.

Delaware is a popular choice because of its history, experience, recognition and pro-business climate. In fact, over half of the companies listed on the New York Stock Exchange are incorporated in Delaware. Recently, Nevada has also gained popularity due to its pro-business environment and lack of a formal information-sharing agreement with the IRS. Nevada does not have corporate income taxes (and Delaware does not tax out-of-state income), and business filings in these states can usually be performed more quickly than in other states.

2. Choose a name

In general, the name of a corporation must end with "incorporated," "corporation," or an abbreviation of one of these. A name will not be accepted if it is likely to mislead the public or if it too closely resembles the name of another corporation formed in that state. Many states also restrict the use of certain terms in a corporation's name (like Bank, Police, or Insurance).

If the name of your corporation will be used in connection with goods or services, you may wish to consider obtaining federal trademark protection for the name. This ensures that no one else in the U.S. may use that name in connection with the same general type of goods or services (except in areas where someone else is already using that name).

3. Choose a Board of Directors

A corporation is managed by its board of directors, which must approve major business decisions. A director can be, but is not required to be, either a shareholder or an officer. Like representatives in Congress, directors are elected by the shareholders and typically serve for a limited term. Each corporation must have at least one director.

Examples of procedures which must be approved by the board of directors include:

  • Declaring a dividend
  • Electing officers and setting the terms of their employment
  • Amending bylaws or the articles of incorporation
  • Any corporate merger, reorganization or other significant corporate transaction

Directors of a corporation owe duties of loyalty and care to the corporation. Generally, means that directors must act in good faith, with reasonable care, and in the best interest of the corporation. If a director stands to personally gain from a transaction with the corporation, he or she must disclose this fact and refrain from voting on the matter, if possible.

4. Choose Officers

Officers are appointed by the board of directors to run the day-to-day operations of the corporation. A corporation must have at least three officers: (1) a president, (2) a treasurer or chief financial officer and (3) a secretary. Officers do not have to be stockholders or directors, but they can be. There is no limit on the maximum number of officers, and no limit on the number of offices that a person may hold. In fact, the same person may hold all offices.

5. Designate a Registered Agent

Each corporation must have a registered agent, the person designated to receive official state correspondence and notice if the corporation is "served" with a lawsuit. The registered agent must be either (1) an adult living in the state of formation with a street address (P.O. boxes are not acceptable) or (2) a corporation with a business office in the state of formation which provides registered agent services.

As previously mentioned, one of the advantages of forming a corporation in your home state is that any officer or director can act as the registered agent. However, there are some advantages to having another person or company act as your registered agent. First, this adds an extra layer of privacy, since the name and address of the registered agent is publicly available. Second, this ensures that if your corporation is named in a lawsuit, no one will surprise you at home on a Sunday night with court papers.

You can find hundreds of expertly written, in-depth articles on business formation in Nolo's Legal Encyclopedia.

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