For centuries, the corporation has been a popular business entity that allows people to band together to form businesses. There’s a wide variety of corporations in existence today, as this business type has quite a few advantages over other business structures, like the limited liability company (LLC), sole proprietorship, general partnership, and more.
We get lots of questions from our readers about corporations. Why are they so popular? How do they differ from other business entity structures? And most importantly, is this the right business type for you? In this article, we’ll run down all the relevant details to answer these questions and many more.
What Is a Corporation?
A corporation is one of the most tried and true methods for a group of people to operate a business together. One of the main tenets of a corporation is the fact that it provides its owners with limited liability protection. This means that if your business is sued, your creditors cannot pursue your personal assets, like your home, car, personal bank accounts, and other personal possessions. Instead, they will be limited to the assets of your corporation itself.
LLCs also receive this same form of personal asset protection, often called the “corporate veil.” However, a significant difference between the LLC and the corporation is the way corporations are allowed to sell stock. While an LLC cannot sell stock to generate investments, the corporation is the only business entity type that can do so, which is one of the biggest advantages the corporation has (more on this in a moment).
In addition, the United States provides corporations with what’s commonly referred to as “corporate personhood.” This means that corporations enjoy the same rights as people do. They can purchase assets, file lawsuits or be sued, hire employees, and more, just like an individual person can.
Pros and Cons of Corporations
- Personal asset protection: The main advantage of a corporation is the same as the biggest pro for LLCs, and that’s the limited liability protection they provide. If your business is sued, you will not be personally held responsible for the corporation’s debts. Instead, your creditors can only sue for the assets of your actual business itself.
- Issuing stock: Another major advantage we mentioned earlier is the fact that corporations can sell stock. Selling stock is the best of both worlds for business owners, as it allows you to raise funds without giving away any management shares. This means that you can use the money provided to your business, without needing to worry about integrating a new manager into your business.
- Unique business name: Sole proprietorships and general partnerships do not actually have business names that they have unique rights to. In fact, these informal business entities don’t have business names at all — they actually operate under their owners’ personal names, because they are not considered to be separate entities in a legal sense. However, a corporation gains exclusive rights to their business names, which protects your branding and marketing in ways informal entities can only dream of.
- No self-employment taxes: For the most part, corporations do not need to pay self-employment tax, which is a 15.3% tax that includes both the employer and employee shares of Medicare and Social Security. The vast majority of corporation owners do not need to pay self-employment tax, because corporation owners are considered to be employees. The only exception is for corporations taxed as “S corps,” as these entities do need to pay self-employment tax on the portion of income that’s paid out as owner salaries.
- Expensive and time-consuming business structure: Compared to most other popular business entity types, corporations are often more expensive to operate, and they also require a significant time investment. Corporations have a rather extensive setup process, and they have regular maintenance needs as well.
- Structural inflexibility: Corporations have extremely rigid structures that need to be adhered to. With an LLC, you have many options for how you want your business to be organized and managed, but corporations are far more strict in this regard. Corporations need to have officers and a board of directors, and they also need to hold regular meetings, take extensive notes from those meetings, etc.
- Double taxation: Taxes can get quite expensive for corporations, due to the fact that most corporations are subject to what’s known as “double taxation.” This means that the business income is first taxed at the corporate level, and then again on the personal level when it’s paid out in the form of distributions.
How Can You Form a Corporation?
If you think the corporation is the right entity structure for your business, it’s time to start the formation process. There are quite a few steps involved with incorporating a business, so you’ll need to make sure you follow this process carefully.
1) Choose a name for your business
Deciding on a suitable name for your corporation is one of the most important steps in the process. You should come up with a few different potential names and run them through your state’s business name database to make sure they’re available. Once you’ve determined the eligibility of your name ideas, you should pick your favorite one and register it with your state.
You cannot include any prohibited words in your business name, which means you can’t use words like “insurance” or “bank” unless you operate one of these business types. You also can’t include any words that are used to describe other business types, like “LLC” or “partnership.”
In addition, you’ll need to include one of the following words to indicate that your business is a corporation: Corporation, Incorporated, Limited, Company, Corp., Inc., Ltd., or Co.
2) Designate a registered agent
Before you incorporate your business, you’ll need to select a registered agent. The role of the registered agent is a crucial part of the American business registration process, as this establishes a consistent point of contact for your corporation. When the state needs to send you important documents — like service of process or annual report reminders — they will deliver them to your registered agent, who will then alert you of the delivery and forward you the documents.
3) Prepare and file the Articles of Incorporation
This is the step that officially forms your corporation with the state. While the name of this document does vary a bit depending on which state you’re forming a business in — in some jurisdictions, it’s known as the Certificate of Incorporation or the Corporate Charter — for the most part, you’ll just need the following basic information:
- The name of your business
- The name and street address of your registered agent
- The identities of your directors
- The type and number of shares your corporation can issue
- The effective date of filing
- The name and address of your incorporator
- Your incorporator’s signature
Depending on your state, as well as on the specific nature of your business, there may be additional steps to fill out the Articles of Incorporation. When you’re finished drafting this document, you should file it with your Secretary of State (or similar state entity), along with your formation fee.
4) Hold your corporation’s initial meeting
Once you’ve officially formed your business, it’s time to set up an initial meeting for your board of directors. In this meeting, your directors will decide on some crucial organizational matters for your business. For example, you’ll need to outline your corporate bylaws, set up your stock and shareholder agreements, appoint officers to handle the daily minutiae of your corporation, and more.
5) Register for taxes
At this point, you’re ready to register for taxes, both with the Internal Revenue Service and also with your state taxation agency. While there are a few select states that don’t charge income tax to businesses, the vast majority will require you to register for state taxes.
You will also likely need to register for some additional taxes as well. For example, if you sell products or services in your state, you will likely need to register your corporation for sales and use tax. There also might be some industry-specific taxes you need to sign up for.
In general, if you operate your business in a highly specialized industry, you should probably speak with a tax attorney or an accountant to make sure you have all your bases covered.
6) Acquire your business licenses
Not all states have statewide business licenses that are required of all entities operating in the state, but some do. Even if your state doesn’t require a general business license, it’s likely that you will need at least one license or permit to be able to operate a compliant corporation.
These permits may be issued on the federal, state, or even local levels. For instance, a business selling food or alcohol will need to get permits to legally provide their customers with these products. If you would like more information on licensing and permitting, check out the Small Business Administration’s licensing resource.
7) Sign up for a business bank account
In order to keep your corporate veil intact, you’ll need to keep your business assets strictly separate from your personal assets. The best way to do this is to get a business bank account. This enables you to keep your business assets in an entirely different account from your personal finances, making it much easier to maintain this degree of separation.
In addition, there are some other practical benefits to having a business bank account. Customers are typically much more comfortable writing checks to your business than they are to you as an individual, and you can also acquire a business credit card to expand your company’s access to credit.
8) Handle ongoing maintenance requirements
Once you’ve gotten your business up and running, there are still some requirements that keep your corporation in good standing with the state. You will obviously need to pay your corporate taxes on an annual basis, and most states also require annual reports.
Annual reports typically serve as a means of keeping the state updated regarding some important functions of your business. These reports inform the state if you’ve made any significant changes to your business, like changing your business name, moving to a new physical address, designating a new registered agent, etc.
Should I Hire Someone to Incorporate My Business?
When forming a corporate structure for your business, you generally have three main options. You can form your own corporation using the DIY method, you can hire an attorney, or you can hire an online business formation service.
The DIY route can require quite a bit of effort, and if you’re not comfortable with the process, it can cause some undue stress. As for hiring a lawyer, many startups can’t afford to spend the thousands of dollars it can cost for an attorney to form your business entity.
This leads us to the third option, hiring an online incorporation service. There are dozens of reputable companies offering this service these days, and they can all save you a tremendous amount of money compared to an attorney. In addition, while these companies may not have as much expertise as an attorney does, they still provide a considerable amount of peace of mind compared to the DIY route.
If you want to take a look at the top options for online business formation services, head on over to our guide to the seven best business formation services available. In addition, we’ll briefly break down our top three options on this page. These are, in our opinion, the best options for business formation service:
- ZenBusiness ($39): ZenBusiness truly has it all. They provide complete incorporation service along with a full year of registered agent service for one incredibly low rate, and they also have stellar customer feedback. It’s hard to go wrong with an offer like this.
- Northwest Registered Agent ($225): Northwest is a bit more expensive than ZenBusiness, but their industry-best registered agent service (included at no extra charge) includes local scanning of every document they receive on your behalf. They also have the best customer support available for incorporation services. If you’re looking for more of a premium service, Northwest is an excellent choice.
- Incfile (FREE): Incfile has a business formation package that is free of charge, as long as you pay your own state fee. That’s obviously an enticing offer, especially when you consider that they also provide a year of registered agent. Throw in their strong customer feedback, and Incfile is an excellent choice for incorporations.
The corporation has been around for centuries, and it’s still one of the most popular business entity types in America today. The biggest selling points of the corporation are the way it provides personal asset protection to its owners, and how it’s the only American business entity type that’s allowed to issue stock, giving entrepreneurs a leg up when pursuing investments.
That said, the corporation isn’t for everyone. An LLC shares many of the same attributes while also providing a more flexible business structure and the option to choose how you want your business to be taxed. There are even some businesses that can get away with operating as sole proprietorships or general partnerships, if you operate an extremely low-risk business.
All told, there are plenty of good reasons why the corporation is so popular to this day, but there’s a reason the LLC is so widely used as well. We hope this article helped you develop your understanding of the corporation’s role in the American business landscape!