Incorporating your business creates a legal entity separate from its owners, providing liability protection and a formal structure for governance and ownership. Corporations are ideal for businesses planning to raise capital, offer stock compensation, or eventually go public. Understanding the incorporation process helps you establish your corporation properly from the start.
While more complex than LLC formation, incorporation follows established procedures that, when done correctly, create a solid foundation for business growth.
Advantages of Incorporating
Corporations provide strong liability protection—shareholders aren't personally liable for corporate debts or lawsuits. This protection has a long legal history and is well-established in case law.
Corporations can issue stock to raise capital and compensate employees. Stock options, restricted stock, and other equity compensation are standard corporate tools. Investors, especially venture capitalists, expect and prefer the corporate form.
Corporations exist perpetually, independent of owner changes. Ownership transfers through stock sales without affecting the entity. This continuity supports long-term business building.
C Corporation vs. S Corporation
A C corporation is the default—it pays corporate income tax on profits, and shareholders pay again when receiving dividends (double taxation). However, C corps can retain earnings at corporate rates, have unlimited shareholders, and offer multiple stock classes.
S corporation is a tax election, not a different entity type. S corps avoid double taxation through pass-through treatment—profits flow to shareholders' personal returns. But S corps have restrictions: maximum 100 shareholders, only U.S. individuals (no entities), and one stock class.
Most small businesses incorporating elect S corp status to avoid double taxation. Businesses seeking venture capital typically remain C corps because investors prefer that structure.
Steps to Incorporate
Choose a corporate name meeting state requirements—typically including "Inc.," "Corp.," or "Incorporated" and not conflicting with existing registered names. Reserve the name if your state allows.
File Articles of Incorporation (sometimes called a Certificate of Incorporation or Charter) with the state. This document creates the corporation and includes basic information: name, registered agent, share structure, incorporator name, and sometimes purpose statement.
Pay filing fees, which vary by state from under 00 to several hundred dollars. Some states charge based on authorized shares or capital.
Post-Formation Requirements
After filing, complete organizational steps to properly establish the corporation. Hold an organizational meeting of the board of directors (or incorporators if no initial directors were named) to adopt bylaws, elect officers, authorize stock issuance, and approve initial actions.
Issue stock certificates to shareholders and maintain a stock ledger. Even closely held corporations should document stock ownership properly. Stock issuance must comply with securities laws, even for private companies.
Obtain an Employer Identification Number (EIN) from the IRS. Open corporate bank accounts separate from personal finances. Apply for necessary business licenses and permits.
Corporate Governance
Bylaws govern corporate operations—meeting procedures, officer roles, director terms, voting requirements, and other internal matters. Bylaws should be adopted early and followed consistently.
Corporations require ongoing formalities: annual shareholder and director meetings, recorded minutes, director elections, officer appointments, and approval of major transactions. Failing to maintain formalities can jeopardize liability protection.
Small corporations often hold minimal meetings, but documentation matters. Even if meetings are informal or waived by written consent, keep records showing corporate decisions were properly made.
Delaware Incorporation
Many corporations incorporate in Delaware regardless of where they operate. Delaware offers sophisticated corporate law, business-friendly courts (the Court of Chancery), and flexibility in corporate governance.
Delaware makes sense for corporations seeking investment, planning IPOs, or expecting significant litigation. For small businesses operating locally, home-state incorporation is usually simpler and cheaper—Delaware formation requires also registering in your home state.
Maintaining Corporate Status
Corporations must file annual reports and pay franchise taxes in their formation state (and any states where registered as a foreign corporation). Missing filings can result in administrative dissolution.
Keep corporate and personal finances strictly separate. Commingling funds, using corporate assets personally, or failing to adequately capitalize the corporation can lead to "piercing the corporate veil"—shareholders becoming personally liable despite the corporate form.
Getting Legal Help
Incorporation involves legal and tax considerations that benefit from professional guidance. A business attorney ensures proper formation, drafts appropriate bylaws and shareholder agreements, advises on stock structure, and helps maintain compliance. For corporations planning to raise capital, attorney involvement is essentially required—investors and their lawyers will examine corporate documentation carefully. Proper incorporation now prevents expensive problems later.