How to Form a Corporation

To form your own corporation, you must take these essential steps.
If you've sorted through the many types of business structures and decided to cr
eate a corporation, you're facing a list of important -- but manageable -- tasks
. Here's what you must do:
1. Choose an available business name that complies with your state's corpor
ation rules.
2. Appoint the initial directors of your corporation.
3. File formal paperwork, usually called "articles of incorporation," and p
ay a filing fee that ranges from $100 to $800, depending on the state where you
incorporate.
4. Create corporate "bylaws," which lay out the operating rules for your co
rporation.
5. Hold the first meeting of the board of directors.
6. Issue stock certificates to the initial owners (shareholders) of the cor
poration.
7. Obtain any licenses and permits that are required for your business.
Choosing a Corporate Name
The name of your corporation must comply with the rules of your state's corporat
ion division. You should contact your state's office for specific rules, but the
following guidelines usually apply:
• The name cannot be the same as the name of another corporation on file with the
corporations office.
• The name must end with a corporate designator, such as "Corporation," "Incorpora
ted," "Limited," or an abbreviation of one of these words (Corp., Inc., or Ltd.)
.
• The name cannot contain certain words that suggest an association with the feder
al government or restricted type of business, such as Bank, Cooperative, Federal
, National, United States, or Reserve.
Your state's corporations office can tell you how to find out whether your propo
sed name is available for your use. Often, for a small fee, you can reserve your
corporate name for a short period of time until you file your articles of incor
poration.
Besides following your state's corporate naming rules, you must make sure your n
ame won't violate another company's trademark. For information about trademark l
aw and general advice on picking the right business name, see Nolol's article Pi
ck a Winning Name for Your Business.
Once you've found a legal and available name, you usually don't need to file the
name of your business with your state. When you file your articles of incorpora
tion, your business name will be automatically registered.
However, if you will sell your products or services under a different name, you
must file a "fictitious" or "assumed" name statement with the state or county wh
ere your business is headquartered. For more information, see Nolo's article Reg
istering Your Business Name.
Appointing Directors
Directors make major policy and financial decisions for the corporation. For exa
mple, the directors authorize the issuance of stock, appoint the corporate offic
ers and set their salaries, and approve loans to and from the corporation. Direc
tors are typically appointed by the initial owners (shareholders) of the corpora
tion before the business opens. Often, the owners simply appoint themselves to b
e the directors, but directors do not have to be owners.
Most states permit a corporation to have just one director, regardless of the nu
mber of owners. In other states, a corporation may have one director only if it
has one owner; a corporation with two owners must have at least two directors, a
nd a corporation with three or more owners must have three or more directors.
Filing Articles of Incorporation
After you've chosen a name for your business and appointed your directors, you m
ust prepare and file "articles of incorporation" with your state's corporate fil
ing office. Typically, this is the department or secretary of state's office, lo
cated in your state's capital city. While most states use the term "articles of
incorporation" to refer to the basic document creating the corporation, some sta
tes use other terms, such as "certificate of incorporation" or "charter."
No state requires a corporation to have more than one owner. For single-owner co
rporations, the sole owner simply prepares, signs, and files the articles of inc
orporation himself. For co-owned corporations, the owners may either all sign th
e articles or appoint just one person to sign them. Whoever signs the articles i
s called the "incorporator" or "promoter."
Articles of incorporation don't have to be lengthy or complex. In fact, you can
usually prepare articles of incorporation in just a few minutes by filling out a
form provided by your state's corporate filing office. Typically, the articles
of incorporation must specify just a few basic details about your corporation, s
uch as its name, principal office address, and sometimes the names of its direct
ors.
You will probably also have to list the name and address of one person -- usuall
y one of your directors -- who will act as your corporation's "registered agent"
or "agent for service of process." This person is on file so that members of th
e public know how to contact the corporation -- for example, if they want to sue
or otherwise involve the corporation in a lawsuit.
Drafting Corporate Bylaws
(Page 2 of 2 of How to Form a Corporation )

Bylaws are the internal rules that govern the day-to-day operations of a corpora
tion, such as when and where the corporation will hold directors' and shareholde
rs' meetings and what the shareholders' and directors' voting requirements are.
To create bylaws, you can either follow the instructions in a self-help resource
or hire a lawyer in your state to draft them for you. Typically, the bylaws are
adopted by the corporation's directors at their first board meeting.
PLAN FOR OWNERSHIP CHANGES WITH A SHAREHOLDERS' AGREEMENT
A shareholders' agreement helps owners of a small corporation decide and plan fo
r what will happen when one owner retires, dies, becomes disabled, or leaves the
corporation to pursue other interests. For more information, see Nolo's article
Plan Ahead for Changes in Corporate Ownership.
Holding a First Meeting of the Board of Directors
After the owners appoint directors, file articles of incorporation, and create b
ylaws, the directors must hold an initial board meeting to handle a few corporat
e formalities and make some important decisions. At this meeting, directors usua
lly:
• set the corporation's fiscal or accounting year
• appoint corporate officers
• adopt the corporate bylaws
• authorize the issuance of shares of stock, and
• adopt an official stock certificate form and corporate seal.
Additionally, if the corporation will be an S corporation, the directors should
approve the election of S corporation status. (For information on whether your c
orporation should adopt S corporation status, see S Corporation Facts.)
Issuing Stock
You should not do business as a corporation until you have issued shares of stoc
k. Issuing shares formally divides up ownership interests in the business. It is
also a requirement of doing business as a corporation -- and you must act like
a corporation at all times to qualify for the legal protections offered by corpo
rate status.
Securities Registration
Issuing stock can be complicated; it must be accomplished in accordance with sec
urities laws. This means that large corporations must register their stock offer
ings with the federal Securities and Exchange Commission (SEC) and the state sec
urities agency. Registration takes time and typically involves extra legal and a
ccounting fees.
Exemptions to Securities Registration
Fortunately, most small corporations qualify for exemptions from securities regi
stration. For example, SEC rules do not require a corporation to register a "pri
vate offering" -- that is, a non-advertised sale to a limited number of people (
generally 35 or fewer) or to those who can reasonably be expected to take care o
f themselves because of their net worth or income earning capacity. And most sta
tes have enacted their own versions of this SEC exemption. In short, if your cor
poration will issue shares to a small number of people (generally ten or less) w
ho will actively participate in running the business, it will certainly qualify
for exemptions to securities registration.
PASSIVE SHAREHOLDER RULES
If you're selling shares of stock to passive investors (people who won't be in
volved in running the company), complying with state and federal securities laws
gets complicated. Get help from a good small business lawyer.
For more information about federal securities laws and exemptions, visit the SEC
website at www.sec.gov. For more information on your state's exemption rules, g
o to your secretary of state's website. (You can find links to every state's sit
e at the website of the National Association of Secretaries of State, www.nass.o
rg.)
Issuing the Shares
When you're ready to issue the actual shares, you'll need to document the follow
ing:
• the names of the initial shareholders
• the number of shares each shareholder will buy, and
• how each shareholder will pay for his or her shares.
Finally, you'll prepare and issue the stock certificates. In some states you may
also have to file a "notice of stock transaction" or similar form with your sta
te corporations office.
Obtaining Licenses and Permits
After you've filed your articles, created your bylaws, held your first directors
' meeting, and issued stock, you're almost ready to go. But you still need to ob
tain the required licenses and permits that anyone needs to start a new business
, such as a business license (also known as a tax registration certificate). You
may also have to obtain an employer identification number from the IRS, a selle
r's permit from your state, or a zoning permit from your local planning board. F
or more information, see the Licenses & Permits for Your Business area of Nolo's
website.
Next Steps
If you're ready to incorporate your business, Nolo offers the following helpful
guides, which come with a CD-ROM of the forms you need:
• Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State,
by Anthony Mancuso (Nolo), or
• How to Form Your Own California Corporation, by Anthony Mancuso (Nolo).