Assuming you have decided to form a corporation (see What Form Should My Company Take? “C” Corporation, “S” Corporation or LLC?) what’s next? The six steps below describe your next moves. Please note, this general description covers the process in Delaware, where most companies are incorporated. The actual steps to incorporation vary by state, we can help you pin down all the details for each state. If you have instead decided to form a limited liability company, see Forming a Limited Liability Company in 5 Steps instead.
Founders typically elect to incorporate as a C corporation, but you may also elect to form an S corporation if you intend to have no more than one class of stock and no more than 100 stockholders, all of whom must be US individuals. The main difference between these forms is federal tax treatment: C corporations face taxation at the corporate level and again at the stockholder level, while S corporations are generally only taxed at the stockholder level (See What Form Should My Company Take? “C” Corporation, “S” Corporation or LLC?). Note that if you decide to form as an S Corporation, you will need to file a Form 2553 with the IRS after you have incorporated in order to formalize this election.
The laws of the state of incorporation will govern your company, including laws related to mergers, directors’ and officers’ duties, stockholders’ rights, filing requirements and fees and franchise taxes due to the state. You must qualify to do business as a foreign corporation in every US state in which you intend to operate, except for your state of incorporation (See Where Should You "Qualify to Do Business"). For business, legal and tax reasons, Delaware is the most common state of incorporation for startups that plan to go the route of venture capital financing (See Why Incorporate in Delaware).
You must be certain that the name you choose for your company complies with your state of incorporation’s statutory requirements: many states both require and prohibit certain words in the formal name. You should then check whether the name you have chosen is available in your state of incorporation and any other states in which you wish to qualify to do business. If you intend to use the business name as a domain name, trademark or service mark, you should also consider running a separate search (such as a trademark or copyright search) for similar names already in use in the market. See What's in a Name? And Confirming You Can Own It and Trademarks for Emerging Companies for more.
- Certificate of IncorporationA corporation is considered to exist when its certificate of incorporation has been filed with the secretary of state. In some states such as California, the certificate of incorporation is referred to as the articles of incorporation, and many people use the terms certificate and articles interchangeably. For a new company, the certificate is generally very brief because very few items must be covered to make the certificate effective. In most states you must designate an incorporator, a registered agent for service of process and an address for the company. The certificate of incorporation must also identify the authorized classes of stock (which is typically just common stock at the time of incorporation), the number of shares of each authorized class of stock, and the par value of the stock. A company can also decide to include terms addressing voting rights, and indemnification and limitations of directors’ liability, and indemnification provisions.
- Bylaws. The bylaws set forth the general governance provisions for the company, typically including details regarding director and stockholder meetings; quorum requirements; acting by written consent; director powers; election and voting; officer roles; election and term; issuing stock; restrictions on transfer; indemnification; dividends; notice of electronic transmission; and other provisions.
You can file the charter directly with the state of incorporation — most companies engage a third-party service company to do this (the company also serves as the company’s registered agent for process). Filing fees apply, though many service companies will advance them for you. Processing times vary, but many states offer rush processing for an additional fee. Remember, your corporation does not legally exist until the charter is filed, not just received. You should receive notice from the state once your incorporation document is considered officially filed.
Once the charter is filed, you will need to finalize the company’s initial capital structure — i.e., issue common stock to the founders and set up an equity incentive plan, and have all founders execute proprietary information and invention assignment agreements. The company will also need to apply for an employer identification number, which is required to open a company bank account.
These half dozen steps can happen in as little as a day, but more often take about a week or two. The more founders discuss these choices up front and talk to legal counsel about any issues or disagreements early on, the better positioned the company will be to incorporate in a time and cost efficient matter. The post-incorporation items discussed above, such as equity allocation and protection of IP, can often be the thorniest issues to tackle. As a result, we think the best practice is to have these items discussed and resolved prior to incorporation so that these steps can happen almost immediately following incorporation. Once you have incorporated and filed, you are off to the races, so to speak. The next big event in the life cycle of your company will be the first round of funding (See 3 Most Common Seed Financing Alternatives – Weighing the Pros and Cons for more).