Maintenance
Part of Corporation formation: roles and liability basics
Corporation formation questions: who answers what
Corporation formation questions sorted by who answers them: the state on legal form, the IRS on elections and the EIN, and your documents on governance.
The questions people bring to corporation formation are usually two questions wearing one coat. Corporation formation questions split into legal form, which a state handles and a lawyer can advise on, and tax classification, for which the IRS sets election rules and an accountant can assess fit. For readers weighing a corporation against an LLC, this article focuses on corporation-specific filings and governance rather than a full entity-selection comparison. 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 filing office—often called the Secretary of State or Division of Corporations—handles state-specific names, forms, public records and recurring reports.
- State rules also govern requirements such as registered agents, annual or biennial reports and franchise taxes; the details vary by state.
- The IRS states the conditions for any tax election. Whether an election suits your business is your accountant's judgment on your numbers.
- Governance questions are not settled by the formation filing; bylaws, resolutions and, where appropriate, a shareholders' agreement address them.
Questions about the legal form
Do I need more than one person to form a corporation?
What Gets Filed Publicly
- Corporation's name
- Address of record
- Contact for legal papers
- Sometimes the directors
- Varies by state
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?
The organizing document is generally called the Articles of Incorporation, though some states use a name such as Certificate of Incorporation. It goes to the state's filing office—California's Secretary of State and Delaware's Division of Corporations are two examples—and the document name, required details and public records vary by state. The reported state filing fee ranges are $50-$300 for profit corporations and $0-$125 for nonprofit corporations; these ranges are not a quote for a particular state.
Ask before you file: the address you give is hard to take back. How to find and read that page is covered in 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. An LLC is a distinct alternative: it generally has members and an operating agreement rather than corporate shareholders, directors and bylaws. 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?
A corporation that meets the IRS requirements can elect S corporation status by filing Form 2553, titled Election by a Small Business Corporation. In general, the corporation must be domestic, have eligible shareholders, have only one class of stock and obtain the required shareholder consent. The IRS's 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?
The election is made on Form 2553, and the filing window depends on the intended effective date. Check the current IRS instructions for the deadline and any late-election relief, and confirm eligibility before filing. Whether the election fits depends on how much the business earns, how owners take money out and what the business can maintain; review those consequences with someone looking at your numbers.
Does the corporation need its own federal identifier?
Corporations generally need an Employer Identification Number (EIN), requested from the IRS using Form SS-4, Application for Employer Identification Number. Applying directly to the IRS is free, and the IRS is the only issuer; the purpose of the number is set out in what the number is for.
Questions about governance
Useful governance questions include: Who may sign contracts for the corporation? Which decisions require board approval, shareholder approval, or both? How are shares issued or transferred, and what should the minutes record? What happens if directors deadlock, an owner leaves, or a shareholder dispute begins?
Governance Questions to Answer
- Who may sign contracts, and what document says so?
- What needs board approval, not an officer?
- How are shares issued, register kept where?
- What happens on death, departure, dispute?
- Who writes the minutes, where do they live?
The formation filing does not answer these questions. Bylaws set internal procedures, resolutions document particular approvals, and a shareholders' agreement can establish owner-level rules where appropriate. Put the relevant documents in place before a disagreement, with legal advice when needed.
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. Events that tend to change it are collected in what happens after formation. One appointment you need either way is 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's rules control. The Secretary of State or Division of Corporations for that state publishes its requirements for names, filings, public records and recurring reports. The general points here do not replace those state-specific rules.
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.
