Forming a S-corporation is somewhat complicated but the following steps should assist in giving a framework of the requirements. Where the corporation is being formed and what kind of business the corporation will be doing will be additional factors that will need to be considered:
- 1) Choosing a Business Name and Availability of Name
Picking out the name of the corporation is the first and some would say, the most important step, as this will be the “calling card” or persona of the corporation as it will be what is most closely associated with your service or goods. It should be a distinctive name that will stick out from competitors in the field. Being easy to remember should also be a consideration. Corporate names must include a signifier like “corporation,” “limited” or “incorporated.”
It is advisable to come up with a list of possible names as the name must also be available for use. Starting out your corporation using something that is identical or even similar to another business’ name could cause major legal problems and can cause the business to be shut down altogether. To find out if the name is available, the first and easiest step is to search the internet using the proposed name to see what kind of results come up. It is important to note that finding another business with the same or similar name isn’t necessarily a block to using that name for your corporation. A corporation that is an entirely different business or industry will not cause the public to be confused about a possible affiliation between the two. However, finding a business using the name in the same, similar or related field is not worth the trouble, especially if that company is large and has the resources to come after your corporation legally. Once the proposed name has cleared state searches, and there aren’t any potentially legal obstacles to using it, it’s time to move on to the next step.
- 2) Designating Board of Directors
Directors can be shareholders and even someone with zero investment interest in the corporation. Choosing who will comprise the board of directors is crucial as they will be responsible for overseeing the corporation and protecting its interests and will ultimately be responsible for the corporation’s acts.
- 3) Registering - Articles of Incorporation
Most corporations will register in the state in which they will be doing most of their business in, though there are tax advantages for filing in certain states, namely Wyoming, Delaware and Nevada. Articles of Incorporation must be prepared and filed in order to establish its existence. Anyone can write them and many states may even have a form that can be followed so that the minimum requirements are met. They are not extensive. States’ minimum requirements for the Articles can vary. Delaware, for example only requires the following:
- Name and address of the corporation.
- The corporation’s business purpose. It is best to leave it vague so as to not limit the business the corporation does in any way.
- Registered agent information, including name and address. It must be a physical address and a P.O. box will not suffice.
- The number of shares, classes and value of each share.
- Name and mailing address of the incorporator or incorporators.
Each state will have a different filing fee which can run from anywhere from $50 up to $500.
- 4) Bylaws
Bylaws may not necessarily be filed with the state but are still required to be created, as they will set forth what the corporation’s operating standards will be. Frequently, the board of directors will draft the bylaws as their first corporate action. The “incorporator,” the person who initiates the process of incorporation, can also create them. Unlike the Articles of Incorporation, the bylaws need to be more detailed. How long and detailed depends on the size of the corporation. The bigger the corp, the longer and more complex the bylaws will need to be. The bylaws need to be kept at the principal place of business as part of the corporation’s business records. Potential investors and creditors may want to review them, so make sure they are kept somewhere that they can be easily located.
The bylaws will set out the following at a minimum and contains some duplicate information as the Articles of Incorporation:
- Corporate information such as the name and principal address for business
- Stock classes and number and type of shares of stock authorized to issue
- Shareholder meeting protocol – location and frequency of the meetings
- How the articles of incorporation and bylaws can be amended
- Corporate record keeping procedure
- What constitutes a quorum for voting purposes
- Day to day responsibilities of each officer
- Corporation’s goals and reasons for doing business
- Number of directors and corporate officers
- 5) Shareholder Agreement
Thought not required as a corporate formality, it is wise to have a Shareholder Agreement in place so that shareholder information, such as the shareholders’ rights and responsibilities, are set forth.
- 6) Open Accounts in Corporate Name
As previously discussed, corporations are a separate entity, and therefore will need to have bank accounts opened in its name. A corporation cannot have a bank account in an individual’s name.
- 7) Hold Official First Corporate Meeting – Board of Directors/Issue Stock
The first meeting of the Board of Directors serves many purposes. It will set the tone for future meetings and the corporation’s goals and vision will be discussed and formalized. Before the first Board of Directors meeting is held, decide how and by whom the minutes of the meeting will be kept. It is important to start off on the right foot here as meticulous record keeping is key for running a successful corporation. All decisions and actions taken by the Board will be memorialized in the minute book. Typically, the minutes will contain the names of the directors attending, date and time of the meeting and will state that the Board will officially adopt the Articles of Incorporation and the by-laws.
The first meeting is also when stock shares will be issued to the initial stockholders. The Board is responsible for setting the price of each share. How the stock is issued will depend on the state that you are in. A form of what is required for each physical share can usually be obtained on-line or from an office supply store.
- 8) Obtain a Federal Employer Identification Number from the IRS
Before you actually start to conduct business, request a Federal Employer Identification (“FEIN”) from the IRS. The IRS requires that any employer that will withhold taxes from its employees be assigned one and can be thought of as the corporation’s social security number. This can be done either on-line, by phone, mail or fax. It is easiest to do so online as you will be given an FEIN number immediately. The FEIN is used by the IRS to identify the taxpayer for reporting purposes of taxes withheld on behalf of their employees. If you haven’t already, make sure you have your corporate bank accounts set up, too. Remember, no comingling of funds!
- 9) File S-Corporation Election form 2553
All S-Corporations start off as a C-Corp and they file form 2553, election by Small Business Corporation (S-Corp).
Requirement to election S-Corp Status:
- Domestic corporation or domestic entity
- The company can not have more than 100 shareholders
- Shareholders are only individuals, estates, exempt organizations or certain authorized trusts
- There are no nonresident alien shareholders
- It has only one class of stock
- Calendar Fiscal year
- 10) Obtain all Necessary Licenses, Permits and Insurance
As each state varies, it is best to check with your state and local government bodies to ascertain what licenses and permits you will need to obtain prior to officially beginning to do business. Usually, this will include a business license from the city or county from which your business will operate in. There are also occupational and professional licenses that may be obtained if the corporation will be doing business in a state-regulated service. If the corporation will be selling products and services, then a sales tax license will also be necessary.
Some states require that employers carry workers’ compensation insurance coverage. Directors & Officers liability insurance may be a good idea, as may employment practices liability coverage. These kinds of policies can help protect the corporation from the high cost of litigation brought against the directors and officers by both employees and other parties.
Once all these steps have completed, the corporation can officially start doing business!