Forming Business Corporation in the US – Things you must know to start up

For new business startups in the USA, there are two options for companies structuring – it is either a Corporation or LLC.  The possibility of forming a C- Corporation is available to business if any of the owners are not US citizens, but if it is the opposite, then they can form S-Corporation or LLC. The owners of Regular Corporation or C- Corporation are shareholders. They elect Directors who appoint officers in various categories like CEO, CFO, and Company Secretary to run the business on a day-to- day basis.

The organization of a Corporation is much more elaborate than LLC, and it is natural that Corporations are usually bigger than those businesses that prefer to take the LLC route. When you are starting a new business, you must have proper knowledge about business organizations in the US and the rules that govern it so that you can make a choice accordingly. The most important aspects that influence your decision is your size of business, business goals, tax structures, legal implications and above all the extent of liability of the owners.  In this article, you will come across all relevant information that can help you to take a decision in C-Corporation formation and you come to know about the way to form it.

C-Corporation and S-Corporation – the differences

The laws of US permit formation of Corporation by businesses that have a single owner and this type of Corporation called S-Corporation is not very common. First, comes C-Corporation and then its status is converted into S-Corporation. On the other hand, for C-Corporation, the number of owners or shareholders of business are unlimited. Obviously, Corporations have very elaborate and complex business organizations and are a separate legal entity that protects the owners from company debt and personal liability.  By its separate entity, Corporations can enter into contracts; buy real estate and can sue and as well be sued by others.  Organizations are eligible for considerable tax benefits as several business expenses qualify for tax exemption. The Corporation records its income in the tax returns. Since setting up a Corporation is expensive, the size of business must justify its formation.

Tax liabilities are more for Corporations

Unlike LLC, Corporations face double taxation. The owners or shareholders are separate entities, and you have to pay tax both at the business level as well as personal level. The firm reports its income and profits in the U.S. Corporation Income Tax Return-Form 1120 and pays tax on the profits as shown on the return.  After paying this first tax at the business level, the shareholders must pay tax on the dividends they earn from shares. This means that there is yet another taxation on business profits as dividends arise from profits. The shareholders declare the tax they pay on dividends in their tax returns.

Looking at it from another angle, you will discover that Corporations do not qualify for tax rebates on dividends paid and shareholders cannot use the element of corporate losses for claiming deductions on their tax returns. Owners must pay tax on salaries, dividends and bonuses as personal taxes and any other element of profit that goes to them attract tax at corporate rates.

Forming C- Corporation

The formation of Corporation depends on the rules of the state where it is incorporated. At a broader level, the rules of incorporation are Corporation and LLC are more or less the same with some distinct differences that occur from the business structure and type of ownership. The process of naming the company and filing articles or organization or incorporation and obtaining EIN are almost similar as that of LLC. The formation of Corporation begins by naming the business followed by the steps of creating leadership, filing articles of incorporation, issuing a stock certificate, applying for business licenses and obtaining Employer Identification Number (EIN).

Name the business

Be careful in choosing the name of your company because it must be one of its kinds so that the Secretary of State recognizes its uniqueness. There must not be another business of the same name already registered. It is better to send a list of three names in order of preference so that the chances of anyone getting through is high. To avoid refusal, do a thorough research of names of businesses already registered. The name must bear the status of business as a Corporation by mentioning ‘corporation,’ ‘limited’ or ‘incorporated’ at the end of the name.

Create business leadership

Create the business organization that starts by appointing Directors who take business decisions and implement it through other officers that they appoint. The Directors provide the guidance and direction for running the business and the officers execute it and take responsibility for daily operations. Decide on the number of trustees and leaders that you appoint by studying the state laws as it might be required to maintain some minimum numbers. Once the organization is in place, write the bylaws that govern the business.

File articles of incorporation

List the details of your business leaders i.e. Directors in the articles of incorporation. It contains your company name together with the contact information and address of Directors. This document gives a legal entity to your business, and you must file with the Secretary of State.

Arrange for issuance of stock certificates

Once the company takes shape, issue share certificates to the shareholders. The stock is a representation of the shareholding of the business that upholds the ownership. Each stock certificate represents a certain fraction of the company ownership. Get the stocks registered with the federal Securities and Exchange Commission (SEC) provided there be more than thirty-five shareholders.

Obtain business licenses and EIN

All companies require specific licenses, and you must get the appropriate licenses to comply with the laws from the local level through state and federal levels. Obtain Employer Identification Number by applying to the IRS. Once you get the number, you can proceed for opening a bank account and take other steps to starting the business.

You are now ready to raise funds for business as your business identity has taken full shape as a Corporation.