Straight answers to the corporation formation questions

The questions people bring to corporation formation are usually two questions wearing one coat. There is a legal-form question, which a state answers and a lawyer advises on, and a tax question, which the IRS sets conditions for and an accountant answers. Almost every confusing thread on the subject is somebody answering one while the reader asked the other.

Below, the questions are separated by which of the two they belong to, plus a third group that belongs to nobody yet.

What to take away

• Legal form and tax classification are separate decisions made with separate bodies. Separating them makes most of the confusion disappear.
• The state's filing office answers every question about names, forms, public records and recurring reports, for its own state only.
• The IRS states the conditions for any tax election. Whether an election suits your business is your accountant's judgment on your numbers.
• The questions about governance are the ones that matter most in year three, and almost nobody asks them in year one.

Questions about the legal form

Do I need more than one person to form a corporation?

In most states one person can hold all three roles: shareholder, director, officer. Whether it is a sensible structure for a single owner is a different question, and it turns on what the machinery is for rather than on whether it is permitted.

What actually gets filed publicly?

That varies by state, and it is the state's own page that answers it. What tends to be public is the corporation's name, its address of record, the contact for legal papers, and sometimes the directors. Ask before you file, because the address you give is difficult to take back. How to find and read that page is the subject of dealing with the state office.

Do I have to write bylaws?

The state usually does not file them. That is not the same as not needing them, since bylaws are what answer procedural questions during a disagreement. Writing them during the disagreement does not count as having them.

Where should I incorporate?

Where you operate, unless a lawyer with your facts gives you a specific reason otherwise. States generally expect a corporation doing business inside their borders to register there whatever it did elsewhere, so the usual result of shopping for a state is two of everything.

Can I convert later?

Often, by more than one route, each with its own cost and possible tax consequences. Ask what the exit looks like before you choose the entrance. The trade-offs across forms are set out in comparing structures.

Questions about tax

How is a corporation taxed?

That depends on the corporation's classification and on any election it has made, and the conditions for those are the IRS's own. Its corporations pages state the current position, and its guidance on the S corporation election sets out the eligibility conditions for the alternative most small corporations ask about. What none of that tells you is which is better for you, because that depends on how much the business earns, how you take money out, and what you can maintain.

Should I make an election straight away?

There are windows, and there are conditions, and there are consequences for how owners are paid. All three have to be checked together by somebody looking at your numbers. This is the single question on which reading a table and acting has the worst record.

Does the corporation need its own federal identifier?

Corporations generally do, and the reasoning is set out in what the number is for. Applying is free and the IRS is the only issuer.

Questions about governance

These are the questions almost nobody asks first and everybody wishes they had.

• Who may sign a contract on the corporation's behalf, and what document says so?
• What has to be approved by the board rather than decided by an officer?
• How are shares actually issued, and where is the register kept?
• What happens to a shareholder's holding on death, departure or a dispute?
• Who writes the minutes, and where do they live?

None of those is answered by the formation filing. All of them are answered by bylaws, resolutions and a shareholders' agreement, and the cost of answering them late is the subject of most corporate disputes among small companies.

Questions with no answer yet

"Will investors want this structure?" depends on investors you have not met. "Is a corporation overkill?" depends on facts that will change. The useful substitute for both is a written decision with a date to revisit it, and a note of what would change your mind. The events that tend to change it are collected in what happens after formation, and one of the appointments you will need either way is described in naming a contact for legal papers.

Common questions

Why do people say corporations are more expensive?

Because the maintenance is real: governance records, possibly payroll, and an accountant's time for whatever classification applies. How much that is in your case is a question of quotation, and any number on a general page would be wrong for somebody.

Can I run a corporation without an accountant?

You can file things yourself. Whether you should choose a tax classification without one is a different question, and the answer is generally no, because the conditions and the consequences interact in ways a table does not show.

What if my state's rules differ from what I read here?

Your state wins. Everything about names, filings, public records and recurring reports is set by the state, and this page deliberately states none of it.

Is a corporation harder to close than to open?

It takes more steps, and abandoning one is the expensive option because obligations keep running. Ask about the closing process in the same conversation as the opening one.

What is the one question to ask a lawyer first?

What do the default rules in this state do to us if we write nothing down. The answer tells you exactly which documents you cannot skip.