Articles of Incorporation

You must file articles of incorporation (sometimes called a "certificate of incorporation" or "charter") with your state (usually with the Secretary of State) and pay a filing fee in order to form a corporation. The filing fee generally ranges between $70 and $200 depending on the state, but certain states have higher fees -- for example, Massachusetts ($275) and Texas ($300). See the state pages on forming a corporation for details on state filing fees.

The articles function like the constitution for the corporation. Ordinarily, the document is short and simple, and you can prepare your own in a few minutes by filling in the form provided by your state's filing office, or by drafting your own based on a sample. Generally, all those people who will be initial shareholders may prepare and sign the articles, or they can appoint one person to do so. Each state has its own required version of this document, so the precise requirements may vary. Below is a list of information commonly required by the states:

• Company Name: You must include the name of the corporation, which typically must include "Corporation," "Incorporated," "Company," "Limited," or an abbreviation of one of these words, such as “Inc.” or "Corp." Most states will not allow two companies to have the same name, nor will they allow your corporation to adopt a name that is deceptively similar to another company's name. For more on naming requirements, see the state pages on forming a corporation.

• Name and Address of Registered Agent: Most states require the name and address (not a P.O. Box) of the corporation's registered agent in the state of incorporation. The purpose of the registered agent is to provide a legal address for service of process in the event of a lawsuit. The registered agent is also where the state government sends official documents required each year for tax and legal purposes, such as franchise tax notices and annual reports. If your corporation incorporates in the same state where you do business, an officer of the corporation can usually serve as the registered agent. If your corporation incorporates in a state other than where it does business, then you will have to hire a registered agent in the state of incorporation. You can find and hire registered agent service companies online, and frequently they can answer questions and provide other assistance with the formation process.

• Legal Address of the Company: Some states require that you include the address of the corporation's principal office (whether or not that address is inside or outside the state of incorporation). This is distinct from the address of the registered agent discussed above, although in some circumstances this address could be the same (i.e., when a corporate officer is serving as the registered agent).

• Incorporator(s): An incorporator is the person preparing and filing the formation documents with the state. Most states require the name and signature of the incorporator or incorporators to be included in the articles of incorporation. Some states also require that you include the incorporator’s address.

• Director(s): Some states require that you list the names and addresses of the initial directors of the corporation in the articles. If the corporation will have only one shareholder, that shareholder may also serve as the sole director. When there will be more than one shareholder, the number of required directors differs from state to state, and some require more than one director. See the state pages for details on the number of directors required by the fifteen most populous states and the District of Columbia.

In other states, you are not required to identify the initial directors in the articles of incorporation (although you may do so if you want). When the initial directors are not named in the articles, the incorporator or incorporators have the authority to manage the affairs of the corporation until directors are elected. In this capacity, they may do whatever is necessary to complete the organization of the corporation, including calling an organizational meeting for adopting bylaws and electing directors.

• Business Purpose: Virtually all states require a statement about the corporation's "business purpose." Most states allow a general clause stating that the company is formed to engage in "all lawful business." It is a good idea where permitted to use this general language to avoid constraining your business activities in the future should the business move in unanticipated directions.

• Number of Authorized Shares of Stock: You generally must state in the articles how many shares of stock the corporation is authorized to issue. Stock is a representation of ownership of the corporation, and this ownership is divisible based on the number of shares that the corporation issues. For instance, say the corporation issues 100 shares -- if you own all 100 shares, then you own the entire company. If you own 50 shares, then you own half of the company, and the remaining 50 shares (and 50% ownership interest) can be divided up among other people (in return for capital contributions, services, as a gift). Unless shares of stock are designated as non-voting stock, shares give their owner the ability to vote for the election of directors in proportion with their ownership interest. (So, if you own 100% of the stock, you get to elect the directors yourself; if you own 75% of the stock, you get 75% of the say in who is elected; and so on).

It is important to keep in mind that, in the articles of incorporation, you designate the number of shares the corporation is authorized to issue -- the corporation is not required to issue all of those shares right away (or ever). It is common practice for corporations to hold on to authorized but non-issued shares in order to add additional owners later or to increase the ownership interest of a current shareholder. In the articles, it is generally a good idea to authorize a large number of shares (several thousand), keeping in mind that the number of authorized shares may be tied to the corporation's state franchise tax liability. For instance, in Delaware, it is a good idea for new corporations to authorize 3000 shares, because this is the maximum number of shares that a corporation can authorize and still qualify for the minimum $35.00 annual franchise tax.

• Par Value: Some states require that the articles state the "par value" of the authorized shares. The par value is the share's minimum stated value -- meaning that a share cannot be sold for less than its par value. Par value of a share is not the same thing as its actual value, and the board of directors has discretion to set the price to be received for stock issued by the corporation without regard to par value (so long as that value is larger than par value, which it always is). Most companies set par value at $0.01 or $1 or no par (some states requiring a designation of par value will accept "no par").

• Preferred Shares: If you plan to authorize preferred shares of stock in addition to common stock, you must include information about the preferred shares, along with information about the voting rights of the respective classes of stock. Preferred shares typically provide for preferential payments of dividends or distribution of assets upon termination of the business. Small business owners often avoid this legal complexity by choosing to authorize only common stock. This approach is simpler and meets the capitalization needs of most small businesses. If you plan on creating preferred shares, you should consult with an attorney before drafting your articles of incorporation.

You can find the required forms and sample articles of incorporation for the fifteen most populous U.S. states and the District of Columbia in the state pages on forming a corporation.

If you want to amend the articles, you can do so by filing articles of amendment with the same official to whom you submitted the original articles. There is usually a prepared form for doing this.

Corporate Bylaws

Corporations are required to write and keep a record of their bylaws, but do not have to file them with a state office.

Bylaws are the rules and procedures for how a corporation will operate and be governed. Although there is no set criteria for bylaws content, they typically set forth internal rules and procedures for the corporation, touching on issues like the existence and responsibilities of corporate offices, the size of the board of directors and the manner and term of their election, how and when board and shareholder meetings will be held, who may call meetings, how the board of directors will function, and to what extent directors and officers will be indemnified against liabilities arising out of performance of their duties. A comprehensive discussion of bylaw content is beyond the scope of this Guide.

Drafting bylaws can be complex, but there are strategies for writing satisfactory bylaws without the expense of hiring a lawyer. FindLaw has posted links to the bylaws of many corporations. Some of these may prove useful as templates, although many of these companies have bylaws that are more complex than your small business would ever need. Findlaw has also posted sample bylaws for a hypothetical Delaware corporation. These are simple enough, but you would need to adapt them for a non-Delaware corporation, which could be tricky. For a small fee (approximately $15), Nolo Press offers a software program, eForm: Corporate Bylaws, which helps you generate bylaws.

The incorporator(s) (i.e., person(s) filing the paperwork) or initial director(s) (if named in the articles of incorporation) generally have the authority to adopt a corporation's original bylaws at the corporation's organizational meeting.

Bylaws may be changed without officially filing amendments.

S Corporation

As an alternative to the ordinary "C corporation" discussed on the Corporation page, you may carry on your online publishing activities as an "S corporation." An S corporation has the same basic organizational structure as a C corporation, with some of the potential tax advantages of a partnership. A corporation obtains "S" status by filing Form 2553 with the IRS. An S corporation generally does not pay federal income tax at the entity level, except for tax on certain capital gains and passive income. Instead, the corporation's profits and losses "pass through" to shareholders, and profits are taxed at individual rates on each shareholder's Form 1040. However, an S corporation must file an annual tax return on Form 1120S with the IRS.

S corporations are formed in the same way as C corporations, but with the "S" tax designation filed with the IRS via form 2553 within two-and-a-half months of the date of formation. Federal law imposes certain requirements on a corporation in order to qualify for "S" status: (1) the corporation may have no more than 100 shareholders; (2) all shareholders must be individuals, estates, or certain trusts (i.e., no corporations, LLCs, or partnerships); (3) no shareholder may be a nonresident alien; and (4) the corporation may only have one class of stock. There are additional requirements, which you can learn about by reading the Instructions for Form 2553.

Your election of "S" status for federal tax purposes does not guarantee that the profits of your S corporation will not be taxed at the state level. The District of Columbia, for example, does not recognize "S" status and subjects the profits of S corporations to the ordinary state corporate income tax. Other states, such as California and Illinois, still tax the profits of S corporations, but at much lower rates than for C corporations. You can find more information about your state's tax laws in the state pages on forming a corporation.

S corporations generally are preferable to C corporations for small businesses because they require basically the same amount of paperwork, but may incur less tax than a C corporation. One drawback of an S corporation, when compared to a partnership or LLC (which have the same potential tax benefits as S corporations), comes with the inflexibility of profit distribution. With an S corporation, profit distributions must be pro rata to stock ownership, not practical contribution to the success of the business or any other relevant criteria. Thus, if a person owns 10% of the company, but does 90% of the work, he or she may only be allocated 10% of the profits. (Keep in mind, however, that this person could be compensated for work through a salary.) Another drawback is that S corporations are generally subject to the same operating formalities required of ordinary corporations, and this makes them a somewhat costlier and more cumbersome option than an LLC or partnership. For details, see the Corporation section.

Close Corporation

Some states, such as California and Texas, have special provisions allowing you to create what is known as a "statutory close corporation." Close corporations generally are formed in the same way as ordinary corporations, but the articles of incorporation for a close corporation must state that the corporation shall be considered a "close corporation" and impose restrictions on transfer of shares of stock. Close corporations also must have a limited number of shareholders -- often 35 or 50 shareholders maximum. For state-specific requirements on forming a close corporation, see the state pages on forming a corporation.

The major reason for forming a close corporation is that it allows shareholders to operate the business under the terms of a shareholders' agreement, which can provide for greater flexibility and informality in managing the affairs of the business (as compared to an ordinary corporation). Shareholders of a close corporation may agree to waive certain operating formalities, such as required shareholder or board meetings. Pursuant to the terms of such an agreement, they can also dispense with the need to form a board of directors and name corporate officers, and they (the shareholders) may run the corporation themselves in a de-centralized fashion. (Incidentally, they may also agree to a distribution of corporate profits other than proportionally based on share ownership.) The downside is that a shareholders' agreement that allows shareholders to manage the corporation may make the shareholders liable for acts or omissions for which the corporate directors are usually liable.

Operating as a close corporation is not popular among incorporators. Negotiating and drafting an effective shareholders' agreement may be a complex and costly undertaking, and there is no apparent advantage of operating as a close corporation rather than an LLC (which also features decentralized management and limited liability, as well as "pass through" tax treatment). If you are interested in forming a close corporation, you should consult with a lawyer.

Double Taxation

The profits of corporations are taxed twice -- once at the entity level (at the applicable state and federal corporate income tax rate), and again at the individual level when profits are distributed to individual owners as dividends (at the applicable individual income tax rate). Avoiding double taxation is one of the commonly noted advantages of operating as a sole proprietorship, partnership, or LLC. Nonprofit organizations that qualify for 501(c)(3) status are exempt from federal (and usually state) income tax at the entity level, so in a sense they avoid double taxation as well.

As noted, avoiding double taxation generally is considered advantageous, but it may not always prove beneficial, depending on your particular circumstances. Owners of businesses with "pass through" tax treatment must pay income tax on their share of the net profits of the business, regardless of the amount of money they actually take out of the business each year. Thus, even if all profits are reinvested into the business, the owners of these businesses must pay taxes on their share of the profits. Shareholders of a corporation, on the other hand, pay income tax only when those profits are actually  distributed to them as dividends. In addition, paying reasonable salaries to shareholders who participate in the operation of the business can ameliorate the burden of income tax at the entity level to a certain extent. Additionally, there may be situations where you as an individual pay income tax at a rate that is higher than the corporate tax rate.

Note: Tax questions are complex, and the details of such questions are beyond the scope of this guide. Consult a tax accountant and an attorney (if necessary) before choosing a business entity based on tax issues.

Corporate Records

In addition to the two major "constitutional" documents (the articles of incorporation and the bylaws), corporations are required to keep copies of a number of other records relating to the the organization, finances, and ownership of the business.

State record-keeping requirements vary. You can find links to your State's specific record-keeping requirements in the State Law: Forming a Corporation section of this Guide. However, as a matter of best practices you should keep copies of at least the following documents in the corporation's principal office (where it is operating on a day-to-day basis) and on file with the corporation's registered agent (this latter step is applicable only if the corporation is incorporated in a state other than the state in which it does business):

• the articles of incorporation and any amendments;
• the corporation's bylaws and any older versions used in the three most recent years;
• a shareholders' agreement or close corporation agreement, if one exists;
• minutes from shareholders' meetings for the three most recent years;
• records of all actions taken by shareholders without a meeting for the three most recent years;
• minutes from board of directors meetings for the three most recent years;
• a list of the full names of all shareholders and their respective ownership interests;
• a stock transfer ledger;
• a list of the full names and last known addresses of all past and present directors;
• a list of the full names and last known addresses of all past and present officers;
• financial records, including federal, state, and local tax returns and reports, for the three most recent years;
• all communications made to shareholders over the three most recent years;
• annual or biennial reports or statements of information filed with the State for the three most recent years;
• resolutions adopted by the board of directors in the three most recent years with respect to one or more classes or series of shares and fixing their relative rights, preferences, and limitations, if shares issued pursuant to those resolutions are outstanding;
• resolutions adopted by the board of directors creating one or more classes or series of shares; and
• any other documents filed with the State.

These requirements are in addition to those required for all small businesses for tax purposes. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.