How to Set Up a C Corporation
Once you have an idea for a company, whether this means selling a product or a service, and you decide to set it up as a C corporation be prepared to devote time, use business methods, and get set up properly so you can make more money, minimize taxes, and generally avoid potential problems.
1. Choose a state in which to form your C corporation.
A C corporation is a creature of state law. It is formed under state law in accordance with the rules of each state. You can complete the set-up steps yourself or use an attorney for this purpose. Either way, there are state filing fees for incorporation that can range from $50 to $500 depending on state law.
Usually it is advisable to set up the corporation in the state in which you are based, rather than in another state that is considered to have laws more favorable to corporations, for example, Delaware or Nevada. For a small corporation, starting out and operating from a single state is less costly, avoiding the need to register to do business and, in some cases, pay additional taxes in multiple states. "If you form a corporation in Delaware or Nevada but are not actually doing business there, you will need to register your corporation as a 'foreign corporation' in the state where you are actually, physically, located, and pay taxes there" Ennico cautions, adding that "if you don't, you will be viewed as operating an illegal business in your state, and it will be only a matter of time before you receive a nasty letter from your state tax authority inviting you to come down for a chat."
2. Decide whether to incorporate on your own or get help.
There are many legal websites these days that enable you to incorporate a business on your own over the Internet. These services charge fees ranging from less than $100 to nearly $500 for do-it-yourself instructions, forms, and sometimes CD-Roms. These services include such sites as LegalZoom, The Company Corporation, and BizFilings.com, among other services. "Some of them are not bad. They tend to do a good job in completing the most important steps in incorporating a business such as filing the Certificate of Incorporation and getting your federal tax ID number (EIN) from the IRS," says Ennico. But Ennico cautions that "none of the do-it-yourself incorporation websites I'm familiar with complete all the steps, such as registering your corporation for state sales, payroll and other important taxes. The better websites will tell you where to go to complete these steps, but they leave it up to you to finish the job. If you're not disciplined enough to follow through, you may not have completed the incorporation process and that may cause problems for you down the road."
Ennico advises that businesses enlist an attorney or CPA to help them form a C corporation. The cost, he says, will usually range from $1,000 to $2,000 and is a good idea, because "that way, you know the job will be done 100% correctly, and if it isn't, you've got someone you can sue for any damages you may incur. The last time I looked, you cannot sue yourself for your own malpractice."
3. Write articles of incorporation.
Articles of incorporation act as a charter to create a corporation. "It's like the birth certificate of the corporation," Ennico says. "It's going to be a matter of public record." Each state dictates what must be included in order to form a corporation in that jurisdiction, Weltman says. Some states require several filings at different times so be sure to check your state's rules. Usually, Weltman says, the information must include the following
- The name and business address of the corporation. The corporation needs a name to describe the business. "The name cannot be one that confuses the company with another business and cannot be one that is barred by state law -- for example, one that is obscene," Weltman says. You also want to coordinate your corporate name with a domain name if you plan to create a website. Your corporate name must be followed by the abbreviation for corporation, incorporated, or limited (corp., inc., or ltd.). For example, if you are starting up a landscaping business, your corporate name might be Lush Landscapers, Inc. (assuming the name is not already in use in your state).
- The nature of the corporation's business. This can be a general description of conducting any legal business activity or it can be restricted to a particular activity.
- The designation of a registered agent in most states. This is a person authorized to receive legal notices from the state or third parties, such as service of process to start a lawsuit, Weltman says. The registered agent can be a corporate officer or a professional registered agent.
- Information about stock. This includes the number of initial shares being authorized, whether there is more than one class of stock, and the value of each share.
The articles of incorporation name the incorporator, who is the person or company responsible for filing required forms with the state, Weltman says. The articles of incorporation may also name the initial directors of the corporation -- the people taking control once the corporation comes into existence, she adds.
