Can a small business be a corporation? Without a doubt, yes. In fact, turning your small business into a corporation can benefit you in many ways.
For example, it allows you to raise capital by selling stock, limits your personal liability, and potentially saves on taxes.
And if you plan to expand your business by hiring more skilled employees and funding and want to go big with it in the future, the corporate structure may suit you even better.
So, how do you make it work for you?
You’ll need to follow a specific set of steps, like filing your articles of incorporation, creating your company’s bylaws, drafting a shareholder agreement, and such. Let’s explain all these in detail.
What is a Corporation Anyway?
A corporation is basically a business that is separate from its owners. It’s like starting a company with its own legal identity.
That means a corporation can exist on its own, independent from the people who started it. You can think of it as being like its own person. Because of this, a corporation can do things like:
- Make agreements and sign contracts.
- Borrow money and take on debt.
- File taxes just for the business.
- Keep operating even if the original owners leave or pass away.
Besides these, the owners who create a corporation have something called “limited liability.”
This means that if the company runs into problems or goes bankrupt, the owners’ personal stuff, like their house or savings, won’t be at risk. They only risk the money they put into starting the company.
Which Type of Small Business Owner Should Consider Forming a Corporation?
Small business owners who have big plans to grow their company in a big way are often a good match for forming a corporation. If your goals involve hiring lots of employees, saving on taxes, getting investments from outsiders, or taking your business public one day, then a corporation can work well.
There are a few key reasons why. First, corporations make it very straightforward to bring in outside money. Investors expect to receive shares of stock in return for their funding. And shares of a corporation can easily change hands compared to other business structures like an LLC, where stake ownership is more restricted.
Also, big corporations are a very familiar concept for investors. So, if you want to attract lots of funding from professional backers, they’ll likely feel more comfortable with the corporate structure they’re used to seeing.
Some entrepreneurs may want to form a specific type of corporation called a Benefit Corporation or B-Corp. This type of corporation lets you operate a business with a legal commitment to creating positive social or environmental impact alongside profits.
Besides, it provides accountability for your mission-driven strategy, which is why B-Corps could be a good fit if you aim to make a difference through your products/services.
So, Curious to learn how transforming your small business into a corporation can supercharge your growth plans and simplify your proposal procedures? Dive into our guide on Business Development and Proposals for some friendly insights!
How to Turn Your Small Business into a Corporation?
As we’ve said already, turning your small business into a corporation is pretty much possible. And although every state has some minor differences in what they require to make it happen, these are typically the main things you’ll need to do:
Picking Your Company’s Name
Before anything else, you’ll need to choose the name of your corporation. You can simply keep the existing name of your small business, but make sure it isn’t already in use by another business.
For this, you can check your state’s website, where they usually have an online tool for searching names and seeing if one is available.
Your state might also have certain rules that the name must follow. So be sure to check up on that, too. To give you an idea, here are two things most states look for:
- The name needs to include the type of business it is, such as “Company” or “Corporation,” or abbreviations like “Co.” or “Inc.” This lets people know it’s an incorporated entity.
- Avoid using words that sound too much like certain types of organizations. For example, don’t use “Bank,” “Trust,” or words associated with government agencies. You don’t want any confusion there.
Set Up Your First Board of Directors
When you start the incorporation process of your small business, you’ll need to appoint an initial team to oversee things—this is your board of directors. You may think of them as a helping guide for the company’s overall vision and strategy.
Their roles are just temporary at first, though. Once your corporation is officially formed, you can exchange this temporary board for a permanent leadership group if you want.
Besides, each state has different rules on how many people should be on the board. Sometimes, one person is enough; other times, you may need three or more directors. It just depends on your location.
File Your Articles of Incorporation
Formally establishing your corporation requires submitting some key paperwork called the Articles of Incorporation. You’ll file this legal document with your state’s business agency, usually the Secretary of State’s office.
Thankfully, most states let you handle this filing process online these days. While requirements vary a bit between locations, your Articles will generally include:
- The name of your company
- The physical address where it’s headquartered
- What kind of work or industry it covers
- Contact info for a registered agent who can accept official documents
- Names and addresses of initial directors/incorporators
It’s smart to look up the specific documents your own state needs beforehand, though, as rules may differ in terms of terminology, forms to use, and fees charged.
Then, once your Articles are reviewed and approved, you’ll receive an official Certificate of Incorporation in return.
Create Your Company’s Bylaws
Some states require corporations to have an additional document called corporate bylaws, which essentially outline how your company will operate. You can draft it either before or after registering as a corporation.
Some key things to address in the bylaws can be:
- Specific roles for officers like CEO, president, etc.
- How business and financial votes will take place
- Scheduling annual shareholder meetings
- Quorum rules around decisions
- Processes for paying out dividends
If you need help drafting your bylaws, you can consult a corporate lawyer for advice. Or you can find templates online to modify accordingly. Just double-check what specific details your state requires to be included.
Issue Stock
After you’ve set up your small business as a corporation, the first thing to do is distribute stock to the founding shareholders.
Now, if you’re wondering what stocks are, they’re ownership shares in a corporation. The shareholders are the owners, and they contribute money or resources in exchange for shares in the company.
You’ll want to keep a formal record of how many shares each investor receives and what they paid for their stake in the company. The maximum number of shares available to sell is called the “authorized shares,” which gets written into the initial incorporation paperwork.
Even though SEC regulations may not be super strict at this small company phase, you’ll still want to double-check things with a business lawyer. They can advise on properly complying with rules regarding share issuance documentation.
Draft a Shareholder Agreement
It’s a good idea for the owner-shareholders of a new corporation to have a written agreement between themselves. This outlines how ownership will be handled if certain situations come up down the line, like someone wanting to sell their shares or leaving the company.
A shareholder agreement prevents problems by deciding things like:
- What happens to someone’s shares if they pass away
- The process for buying back shares if an owner retires
- Rules for share transfers if ownership needs to change hands
Since these agreements are legally binding contracts, you’ll be wise to consult with a small business attorney when handling them. They can craft an arrangement customized to your company’s specific needs and goals.
Get Your Company’s EIN
The IRS will want to properly identify your new corporation for tax purposes. And for this, you’ll need to secure an Employer Identification Number or EIN.
Think of it like a Social Security Number but for your business — the EIN lets the IRS recognize your corporation when it comes to filing taxes. And you’ll need it for several important startup tasks, such as opening a business bank account or setting up payroll deductions.
The good news is, you can easily get an EIN online at the IRS website for free. It only takes a few minutes to complete the application.
On a Final Note
As you can see, anyone can turn their small businesses into corporations. After becoming incorporated, though, make sure to stay on top of your state’s ongoing requirements to keep things legit. Pay attention to things like annual reports, holding shareholder meetings, financial record keeping, and such.
And since requirements differ in various states, be sure to check in with your state agency or consult a small business attorney. That way, you can understand exactly what you need to do to stay compliant long-term as your company operates as a corporate entity.
