A corporation is a business structure that provides personal liability protection by separating the owner’s personal assets from the business’s assets. Thus, a corporation is liable for the business’s actions and finances, while the owners (known as shareholders) are not.
Corporation Pros
- Corporations provide liability protection for the shareholders
- A corporation can raise non-debt financing by selling shares of the business
- Taxation may be lower than a sole proprietorship or partnership
Corporation Cons
- Corporations are more complex and expensive to set up than sole proprietorships, partnerships, and Limited Liability Companies (LLCs)
- At a minimum, corporations are required to hold an annual board of directors meeting and shareholders meeting, take minutes at the meetings, issue shares, etc., to maintain the entity’s liability protection.
Generally, Corporations are chosen over Limited Liability Companies when a significant amount of funding is being raised from investors. However, due to the cost and complexity of a Corporation, most small businesses are better off forming an LLC.
Related: How To Form An LLC In Hawaii
The following steps are to create a domestic Corporation, the most common type for businesses. The other types of corporations in Hawaii include foreign corporations (out-of-state corporations wanting to operate in the state physically), professional corporations (designated for corporations offering professional services), and non-profit Corporations.
Related: Hawaii Business Checklist
Steps to Forming a Corporation in Hawaii
Step 1: Choose a Name
The first step in forming a Corporation in Hawaii is selecting a name.
The name of the Corporation has to be different from other entity names in the state of Hawaii. Check available Corporation names in Hawaii.
The name of the Corporation must include one of the following designators at the end of the business name:
- Corporation
- Incorporated
- Limited
- Or an abbreviation for one of those words: Corp., Inc., or Ltd.
A comma may be used after the business name and before the designator. For example, “Common Grounds Coffee Inc.” and “Common Grounds Coffee, Inc.” are acceptable.
If you want a name but are not ready to register the Corporation, you can file the Application for Reservation of Name (Form X-1) with the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division (BREG). The name reservation will hold a name for up to 120 days.
While a Corporation has to select a unique name that another Hawaii Corporation isn’t using, that doesn’t guarantee the name isn’t currently in use by someone else. So before registering a Corporation name, be sure to do a trademark search to verify it is available for you to use.
Step 2: Choose a Registered Agent
To have a Corporation in Hawaii, a Hawaii Registered Agent must be identified to act as a central point of contact for receiving legal documents, tax notices, summons, subpoenas, etc., on behalf of the Corporation. This can either be a resident of Hawaii or a commercial registered agent service.
You can act as the Corporation’s Registered Agent in Hawaii, and you are not required to pay for a registered agent. The requirements to be a Registered Agent are generally available during normal business hours and have a physical street address in the state. A PO Box is not allowed.
Related: Do I Need A Registered Agent In Hawaii?
Step 3: File the Hawaii Articles of Incorporation
Next, you can start filing the Articles of Incorporation with the Department of Commerce and Consumer Affairs, Business Registration Division. The Articles of Incorporation can be filed on the Hawaii Department of Commerce and Consumer Affairs, the Business Registration Division’s website, or Form DC-1.
The information requested includes:
- The name of the Corporation must contain the words “Corporation,” “Incorporated,” “Limited,” or an abbreviation.
- Mailing address of the Corporation’s initial principal office.
- Registered Agent’s name and the physical address of the registered office.
- Number of shares that can be authorized to be issued.
- The incorporator’s name, address, and signature. This can be the corporation’s owners or someone helping with the formation of the entity.
The Hawaii Articles of Incorporation can be filed online or submitted by mail. The mailing address is:
State of Hawaii
Department of Commerce and Consumer Affairs
Business Registration Division
P.O. Box 40
Honolulu, Hawaii 96810
Step 4: Create Corporate Bylaws
Bylaws are the general guiding principles and procedures for the business’s operations. For example, the bylaws may include the name of the corporation’s officers, the responsibilities of the board members, terms of office, procedures for removing or adding a new director or shareholder, policies for authorizing new shares, when shareholder and director meetings will be held, and more.
Step 5: Hold the Initial Board of Directors Meeting
During the first board meeting, the board of directors will, at minimum, elect the corporation’s officers (the President, Vice President, Treasurer, and Secretary). They will also typically review and approve corporate bylaws, choose a bank, issue shares of stock, and decide whether the Corporation will be taxed as a C corporation or S corporation.
It’s critical to remember that taking meeting minutes at all meetings is necessary to protect the shareholders from lawsuits and court actions. The minutes provide a written record of all decisions and actions taken during the meeting. Minutes aren’t filed with the state, however, they need to be stored along with other Corporate documents.
Step 6: Issue Shares of Stock
The corporation can exchange shares of stock in exchange for money or services. The number of shares of stock issued cannot be more than the number of authorized shares listed in the Articles of Incorporation.
Step 7: Obtain an EIN
The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Tax ID Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Like an individual’s social security number, the EIN identifies the Corporation for tax purposes. For example, the EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file tax returns, and more.
The EIN is free when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.
Step 8: Elect the Corporation’s Form of Federal Income Taxation
By default, a new corporation will be taxed by the Internal Revenue Service (IRS) like a C-Corporation. C-Corporations pay corporate taxes on their profits, and the owners pay personal income taxes on their dividends.
A Corporation can elect to be taxed as an S-Corporation. S-Corporations are taxed as “pass-through entities,” meaning the Corporation does not file corporate taxes. Instead, the profits (or losses) “pass through” to the shareholders, who then report this income on their individual taxes.
For most small businesses, the S-Corporation tax election is the most beneficial because it eliminates the double taxation of the C-Corporation. This tax election can be changed; however, it is highly recommended to talk with an accountant before making this decision.
Step 9: Open a Bank Account
Opening a bank account for your Corporation is important for liability protection as the bank account separates the business’s funds from the member’s personal funds.
Several documents will be needed to open a business bank account, such as:
- A banking resolution is a document that authorizes the members to open a business bank account on behalf of the LLC.
- Copies of the original Articles of Incorporation showing the creation of the Corporation in addition to the bylaws.
- Driver’s licenses of the members.
- Depending on the age of the Corporation, a Hawaii Certificate of Good Standing may be needed to prove the business entity is active and in good standing with the state.
Step 10: Apply for Business Licenses and Permits
Depending on what your business does and its location, various business licenses and permits will likely be needed before starting your business. Some common registrations include:
- Business License – The state of Hawaii doesn’t have a general business license; however, there may be local business license requirements.
- Professional License – Certain services, such as barbershops, accountants, salons, and others, must be licensed.
- General Excise Tax (GET) License – Registration with the Hawaii Department of Taxation is necessary to sell products and certain services.
Related: How To Register A Business In Hawaii
Step 11: File Annual Reports
Corporations are required to submit an annual report to the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division, every year.
Annual reports are filed during the quarter of the Corporation’s anniversary date. For example, if the Corporation was registered on February 19th, the annual report will be filed between January 1 and March 31. The due dates are March 31, June 30, September 30, and December 31.
