Setting up a Corporation

Setting up a corporation is one of the options open to you for your new business formation. Often, small-business owners think that corporations are only for large businesses, multinational businesses or businesses which already have huge turnovers. However, this isn’t always the case, and there are many reasons why you might decide that setting up a corporation, rather than sole proprietorship or a Limited Liability Company, is right for you.

This page explains everything you need to know about filing with the state as a corporation, how to go about it and some of the popular alternatives.

Even better, if you choose to file as a corporation, with IncReg on your team, we will do the hard work for you, Leaving you to focus on getting everything running smoothly.

What are corporations?

Corporations are legally designated entities that are owned by their shareholders. Unlike a Limited Liability Company, they don’t have a single owner (or owners) in full control of the company. Of course, corporations have key job titles and people performing important roles who make the decisions, like Chief Executive Officer, but ultimately they answer to their shareholders.

For this reason, many business owners decide to start as Limited Liability Companies or Sole Proprietors as they retain full control of their company. But this isn’t always the case. Sometimes, there are compelling reasons to jump right into becoming a corporate entity.

Corporations have strict rules they must adhere to. For example, your corporation must have at least one shareholders’ meeting a year, and it must have certain roles and positions within its structure. As the owners, shareholders have an important voice in corporations, and they are the ones who elect key positions like the board of directors. Nevertheless, apart from voting in annual meetings, shareholders aren’t responsible for the actual running of the corporation—that is entirely down to the business, the board of directors and the other staff.

Corporations differ depending on their tax designation (S Corp and C Corp), and whether they are for-profit or not-for-profit. It’s important to understand the differences before you decide what kind of corporation you want to file for.

S Corporations and C Corporations

There are two main types of corporations, and the one you choose will probably be decided by how you prefer to pay tax on your business, how fast your business is expanding and your appetite for rules and regulations. It’s important to make the correct choice, which is why IncReg’s experts are ready to counsel you on the process if you need any guidance.

S Corporations

As a legal entity that is separate from its shareholders, S Corporations (S corps) offer limited liability protection from losses or fines. So if your business is in debt, the creditors won’t be able to come after your personal assets or those of the other shareholders.

Furthermore, an S corp enjoys pass-through tax status. This means that the corporation doesn’t pay tax on its own revenue. Instead, the profit is passed to you as a shareholder. You then report this through your personal income tax return and the IRS tax you accordingly.

In this way, S Corporations also have the same federal tax status as Limited Liability Companies. As the profits made by the business are only taxed once, this can lead to you paying less tax overall.

C Corporations

Like S corps, C Corporations (or C corps) are owned by shareholders who have limited liability protection for any debts or obligations the entity might be subject to. So again, if something goes wrong, the organization is on the hook, not you.

Household names like Starbucks and Apple are C corps. Coincidentally, they are also famous for growing quickly. Financial experts believe this is because incorporating their businesses as C corps gave them rapid access to investment they would not otherwise have had.

Unlike S corps, the revenue you make through your C corp gets taxed twice—also known as double taxation. That means the government taxes your corporation’s profit once (under Subcharter C of the United States Internal Revenue Code), and then you also pay tax on the dividends that your organization pays you.

Should I incorporate as an S corp or a C corp?

When you file your articles of incorporation with the state, by default your corporation will be incorporated as a C corp. If you want to file as an S corp, you’ll need to prepare additional forms (Form 2553) and complete the other compliance criteria required to form as an S corp.

Because S corps give you single taxation and fewer regulations, many small-business owners choose this route rather than incorporating as a C corp. However, there are pros and cons to both.

S corp

Pros:

• Single pass-through taxation. You don’t have to worry about paying tax on the earnings your company makes.
• Fewer regulations. S corps are easier to set up and manage than C corps, and therefore cheaper.
• Cheaper to sell. As a pass-through entity, if you decide to unwind your interest in your organization, you’ll pay less tax than with a C corp.
• Issuing shares. Although fundraising with an S corp can be a little harder than raising finance with a C corp, you still have plenty of opportunity to raise finances through issuing shares—something that’s impossible with a Limited Liability Company.

Cons:

• Complicated to form and manage. Although easier than setting up a C corp, this type of business takes more time and money to establish than a Limited Liability Company or a Sole Proprietorship.
• Shareholder limitations. You can only have 100 shareholders as an S corp. This can limit the amount of money you can raise during the early growth phase of your business. If you grow rapidly and want to expand beyond your 100 shareholders, you’ll have to file as a C corporation.
• Domestic limitations. Your 100 shareholders must all be US citizens, permanently resident in the United States. Also, you can’t issue stock to other corporations, which limits your potential pool of investors.

C corp

Pros:

• Unlimited shareholders. You can sell stock to more than 100 people, allowing you to grow rapidly.
• No domestic shareholder limitation. Unlike an S corp where all your 100 shareholders must be US domiciled, you can issue stock to anyone you want, anywhere in the world you want. Even better, they don’t have to be people as you can issue stock to other corporations.
• Shareholder benefits. If your shareholders are also employees, your corporation can give them benefits like health insurance. These costs are then deductible by the corporation rather than the shareholders who received them.

Cons

• It’s expensive and time-consuming to incorporate as a C corp. The operating costs are higher too; you will definitely need a lawyer and an accountant working for your C corporation.
• Rules and regulations. It’s more complicated to set up and comply with rules and company bylaws with a C corp than with an S corp.
• Double taxation. Shareholder-employee benefits notwithstanding, you and the other shareholders are liable to be taxed twice on profits made by a C corp when they are passed to you as dividends.

How to set up a corporation

The easiest and quickest way of forming your corporation is to contact our team and let us guide you through the process. Our experts will arrange the filing package which is right for your business, and we’ll keep you informed every step of the way.

However, if you’d like to go it alone, these are the stages that you’ll need to pass through to get your corporation off the ground.

• Think of a name for your company. Note that this will need to be unique. You’ll also need to put together a clear description of what your business does.
• Appoint a registered agent. This is the person who is authorized to receive official documentation relating to your company—they need to reside in the state where you file.
• Count up your shares and who you issued them to.
• Use this information to file your Articles of Incorporation with the state.
• Create your bylaws which govern how your company is run. These control areas like how often your board of directors meets and what your rules are for amending operating procedures.

Converting your Limited Liability Company (LLC) to a Corporation

If you already have an LLC and you’d like to expand into filing as a corporation, the good news is that you can do so. The method you take will depend on the state where your LLC resides.

The simplest is called a Statutory Conversion and requires you to file your conversion documents with the state. Contact us, and we will explain your options.

What are the alternatives to setting up as a corporation?

Limited Liability Companies

Many small-business owners choose to file as a Limited Liability Company. Doing so gives you all the limited liability protection of a corporation, without the additional complication of having to follow the rules, regulations and company bylaws of a corporation. Moreover, you aren’t answerable to other shareholders or a board of directors. Nevertheless, an LLC, while being a great choice for many businesses, doesn’t have quite the same level of authority as a fully-fledged corporation, making it harder to raise capital. Nor is it recognized internationally.

Sole Proprietorship

Sole Proprietorships are simple and cheap to get started. You don’t need to file Articles of Organization or Incorporation with the state, but you also don’t get the legal and financial protection of a Limited Liability Company or a corporation—or the client-reassuring status of having a more formally established businesses.

Final thoughts on setting up your corporation

To sum up, most smaller businesses choose to set up as an S corporation. There are fewer regulations and costs at the outset, while you still have the option to issue shares and raise capital. Nevertheless, if you’re at a strong growth phase of your business, a C corp gives you the room to expand fast, raise finance and sell shares to international investors.

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