Small businesses face endless challenges, and companies reaping the benefits of incorporation have additional legal obligations to fulfill. A corporation is an imaginary entity that exists only for legal purposes. Once the papers are filed, the corporation is an independent legal 'person' apart from the workers.

The major benefit to forming a corporation, or 'incorporating,' is protection against liability. Lawsuits and debt will fall on the corporation rather than on individual people. Forming a corporation starts with a few simple steps:

1. Name it. Decide on a unique name for the corporation and register it in the state of incorporation.
2. Form it. A corporation needs officers, shareholders, directors, bylaws and shares.
3. File it. Complete and file the correct paperwork.

A little bit of action will lead to protection for yourself and other members of your small business.

Action Steps
The best contacts and resources to help you get it done

Choose a name and state

A good corporation name involves more than creative genius. Corporations need unique and functional names that are not already in use. Once you have found an effective name, quickly file for a trademark at the U.S. Patent and Trademark Office (USPTO).

I recommend: To find out if a name is taken, research possible names at the USPTO, check business directories like InfoSpace or conduct an Internet domain name search. You can incorporate in another state besides your state of residence. Nevada and Delaware are popular for tax reasons; other states such as Wyoming and New York are gaining popularity.

Take care of the people

Every corporation needs officers, shareholders and directors. Officers usually include a president, vice president, secretary and treasurer. Once these roles are assigned, the corporation will hold the first meeting of the board of directors and assign stock to its shareholders.

I recommend: Find specific duties and responsibilities for each position on Web sites like Coollawyer.

Create bylaws

Bylaws are the rules dictating how the corporation will be run. The board of directors is responsible for making and enforcing those rules.

I recommend: Materials to create bylaws can be found online.

File the paperwork

No matter what type of corporation you form (C, S or limited liability); it does not exist until the paperwork is filed with the state of incorporation. A C corporation needs to file Articles of Incorporation, Bylaws, Organizational Board Resolutions, Stock Certificates and Stock Ledger. An S corporation needs to file Articles of Incorporation, Bylaws, Organizational Board Resolutions, Stock Certificates, Stock Ledger, IRS Form 2553 and State S Corporation election.

I recommend: These forms are available online, as well as further information on C corporations and S corporations.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Corporations aren't required to provide insurance and/or pensions. If these benefits are offered, take time to research the federal law standards by which they need to be managed.
• •  The differences between C and S corporations only involve taxation. Corporations are automatically in the C class unless they elect to become S corporations.
• •  Most states allow one person to hold several positions in a corporation. For example, in many small corporations, most or all of the shareholders are also directors.