How To Form A Corporation
Originally Published : October 26, 2015
Anyone who seeks to launch a business must contend with the issue of structuring this entity in such a way so that it complies with all applicable legal requirements, such as filing taxes, sending documentation to regulatory bodies, and so forth. In general, this process involves creating a formal corporation, LLC, or a similar organization recognized by law. For many, this can seem like a frighteningly huge burden, especially if one associates “corporation” with massively complex multinational originations that have millions of dollars in revenues. In actuality, the process is far simpler and more manageable than you probably realize—but there are important issues that you must know about. Having said that, let’s explore the steps you must take in order to form a corporation.
Why Form a Corporation?
Of course, the first question you might ask is, why bother? Is it really necessary to go through the trouble of filing paperwork to create a corporation? Strictly speaking, it isn’t. If you fail to register your business as a corporation or an LLC, then it will be treated for legal purposes as a sole proprietorship, if there is one owner, or as a general partnership, if there is more than one.
The problem with this approach is that it exposes your personal assets to lawsuits. If you haven’t formally created a corporation or an LLC, your property—not the company’s—is at risk if your business is sued. Conversely, individual members of a corporation cannot be sued, and the private assets of these individuals (e.g., houses, bank accounts) cannot be seized to comply with a court judgment relating to the activities of the business.
Forming a corporation, then, is just good business sense. So, how does one go about formally creating one? Before we can answer that, you must first decide which kind of business structure you will establish for your organization. There is more than one type of corporation, and to make matters potentially even more confusing, some “corporations” are really something else entirely.
Types of Corporations
Essentially, there are two types of corporations that you might wish to consider.
An S corporation is treated as a “pass-through” tax entity. This means that all corporation profits are reported to the tax authorities on the returns on the individual shareholders. In addition, the business will not have to pay any federal corporate taxes. That may sound appealing, but an S corporate is heavily circumscribed by law in its operations. Among other restrictions, it is allowed to have no more than 99 shareholders, it cannot be owned by another business, and it cannot issue stock shares. Small businesses commonly register as S corporations.
A C corporation is relatively flexible. With this structure, the corporation can have an unlimited number of owners, and it may be legally owned by another business. Furthermore, a C corporate is not a pass-through entity, and therefore an owner has the option to keep profits in the business in order to avoid being taxed on their personal returns. This option is often pursued to minimize the hassles of double taxation, one of the pitfalls of a C corporation, in which the business is taxed on its profits, and then an owner is taxed on profits taken out of the business.
Another option is to form a limited liability company, or LLC. Note that technically this isn’t a corporation, though many believe otherwise—a misperception compounded by the widespread tendency to erroneously refer to an LLC as a “limited liability corporation.” However, many people find it a viable alternative to forming a corporation, and it’s important to understand how it works. Like an S corporation, an LLC is a pass-through tax entity that protects its owners from liability—yet it benefits from flexibility and various advantages unavailable to the former type of structure. Administrative burdens are considerable lighter with an LLC; there’s less paperwork that needs to be sent off to various regulatory agencies. On the other hand, some states—New York among them—impose a franchise tax on limited liability companies. Still, the LLC option is popular among those wishing to launch a small business.
Forming a Corporation in New York State
To form a corporation, the owners of the company must fill out and sign the Certificate of Incorporation and file it with the New York Department of State; the current fee is $125 (as of October 2015). When this has been accomplished, the corporation has been officially created. At this point, the owners of the newly established corporation are expected to hold a formal meeting to elect board directors and adopt by-laws, among other actions dictated by law. The owners will also receive a filing receipt verifying that the paperwork and applicable fees have been properly processed; this information should be checked to ensure its accuracy.
- Strictly speaking, it’s not necessary to obtain the services of a lawyer to fill out a Certificate of Incorporation, but don’t forget that this is a legal document that imposes obligations that incorporators must abide by. Any mistake can have costly repercussions. An experienced attorney can help ensure that nothing goes awry.
Forming an LLC in New York State
To form a limited liability company, you must first settle on a name. This name must include “LLC,” L.L.C.,” or “Limited Liability Company.” Additionally, it must be distinguishable from other businesses already registered with the New York Secretary of State.
You must file an Articles of Organization form with the Secretary of State. As of October 2015, the filing fee is $200, which may be paid by check/money order (payable to Department of State), cash (except through the mail), Visa, MasterCard, or American Express. Upon receiving the signed document, the Department of State will send a filing receipt. The LLC has now been officially formed, and its owners will now be expected to comply with all applicable rules governing the activities of these companies.
For more information about how to form a corporation or how to start up your own business, please visit https://helbraunlevey.com