Corporate law is a complicated field, and there is a lot to know about this sector of law. If you’re considering forming a corporation, you will definitely need to hire an attorney. It’s not advisable to try to go through the process yourself, as there are so many technicalities. You want to do it correctly the first time to avoid excess hassle and cost.
In this guide, we’ll discuss the benefits (and drawbacks) of forming a corporation. We’ll go through the basic steps of forming a corporation, providing an overview of what the process will look like. It might seem confusing, but corporate formation could have excellent advantages for your business.
Benefits to Forming a Corporation
The main reason that people form corporations is to limit their liability. If you own a sole proprietorship or a partnership, you (and your partner[s]) are on the hook for the business’ debts and liabilities. In many cases, creditors will go after your personal assets when collecting on business debts.
Personal asset attacks are almost always not an option for creditors if you have a corporation. Advantages include personal liability protection, easier access to capital, and business security and continuity.
Drawbacks to Forming a Corporation
As with anything, there are drawbacks, even in the face of the aforementioned benefits. Disadvantages to corporate formation include how time consuming the process is. There are also rigid formalities and protocols to follow, and corporations are subject to what’s known as “double taxation.”
“Double taxation” occurs when the corporation’s profits are taxed, and then the profits are taxed to the shareholders after being distributed as dividends. There is no tax deduction when distributing dividends to shareholders, nor can shareholder deduct any of the corporation’s losses from their taxable income.
The IRS Definition
The Internal Revenue Service describes corporate formation as a process by which prospective shareholders exchange property or money (or both) in exchange for capital stock in a corporation. The corporation takes the same deductions as a sole proprietorship when calculating its taxable income, but it can also take special deductions.
Corporate Formation: A Step-by-Step
Though by no means exhaustive, and every single step has sub-steps of which to be aware, this step-by-step corporate formation guide is an overview of the process, giving you some idea of what to expect. In general, you will have to follow the steps below.
First, you should hire a transactional lawyer. This lawyer will walk you through the process of forming a company. Laws vary by state, and they are always changing, so hiring an experienced attorney will get your formation process off to a great start.
Second, you must appoint a registered against. This individual can be a person or a company—called a registered corporate agent—and he, she, or it will accept the service of process on behalf of the corporation. If your corporation is party to a lawsuit, the agent will get the mail. The agent should file the articles of incorporation. After these articles are filed, you can move on to the next step.
Third, you must create the corporation’s bylaws and appoint the corporation’s directors. The bylaws are rules and regulations your corporation must follow. These laws lay out the responsibility of shareholders, officers, and directors, and ensure there is no confusion or blanks left missing. In some cases, banks might want to see your bylaws before giving you a loan or letting you open a corporate account.
Fourth, it’s time to issue stock. Shareholders are entitled to stock when they contribute cash, property, and/or services to the business. They have an ownership interest. Shares are classified as securities, which usually fall under state and federal law pertaining to them.
Fifth, you should file anything else that’s necessary with your secretary of state. An attorney will help you clean up loose ends and get in documents before the deadline. Annual reports are an example of required documents you must submit in Florida.
Sixth and finally, you should apply for an EIN (employer identification number), which is sort of like a Social Security number for your corporation. You’ll use your EIN when you file corporate taxes and apply for bank accounts. Filing usually takes a month, though you can apply online and get an EIN almost immediately. You should file any other necessary IRS forms at this point, too.
Once again, you should hire an attorney to complete this process. An attorney will also be able to advise you on whether the process is right for your business, considering your industry, financial situation, tax liabilities, and other pertinent information.
Visit WFP’s website to find out more about corporate formation.