How to form a C corporation in Hawaii

A C corporation is a separate legal entity owned by shareholders and run by a board of directors and the officers it appoints. It shields the owners' personal assets from the business's debts, and it pays its own federal income tax at a flat 21% rate. When profits are paid out as dividends, shareholders pay tax on them again, which is the "double taxation" you hear about.

A C corporation usually makes sense when you:

• Plan to raise venture capital. Most venture investors require a C corporation, because it can issue preferred stock and have unlimited shareholders, including companies and foreign investors.
• Want to offer stock options to recruit and keep employees.
• Will reinvest most profits in the business rather than pay them out, so the 21% corporate rate applies instead of the owners' personal rates.
• Hope to qualify for the small business stock exclusion. Under Section 1202, gain on qualified small business stock held long enough can be partly or fully excluded from federal tax. The rules are detailed, so check with a tax professional.

If you'd rather have profits pass through to your personal return, compare forming an LLC in Hawaii or electing S corporation status in Hawaii.

Your name must be distinguishable from every business already on file with the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division. Search the state's business records before you settle on one; the Hawaii filing office's website is the place to start.

The name also needs a corporate ending. "Corporation," "Incorporated," "Company," "Limited" and their abbreviations (Corp., Inc., Co., Ltd.) are the usual choices, but Hawaii sets its own list, so confirm it before you file. Words that suggest a regulated business, such as "Bank" or "Insurance," generally need approval or a license.

Before you commit, check that the matching domain is free and search the USPTO trademark database so the name won't collide with a registered mark. Our guide to choosing a business name covers the details.

Every Hawaii corporation must name a registered agent: a person or company with a physical street address in Hawaii that accepts lawsuits and official state mail for the corporation during business hours. A P.O. box doesn't qualify.

You can name yourself or another officer if you have a Hawaii street address and are reliably there during business hours. Many owners use a commercial agent instead, which keeps a home address off the public record and makes sure nothing time-sensitive is missed. EZ Entity Setup can serve as your registered agent, and it's included with the Advanced and Premium plans.

Settle a few structural questions before you file, because the Articles of Incorporation asks about them:

• Authorized shares. The most shares the corporation may issue. Founders commonly authorize far more than they issue on day one, which leaves room for investors and option grants.
• Par value. The nominal minimum price per share. Many founders choose a very low par value, such as $0.0001, when the state allows it.
• Incorporator. The person or company that signs and submits the filing. It can be you, or the service filing for you.
• Directors and officers. The board oversees the company and appoints officers, typically a president, a secretary and a treasurer. In a small corporation one person can often hold several roles.

Submit the Articles of Incorporation to the Hawaii Department of Commerce and Consumer Affairs, Business Registration Division. The state filing fee is $50. Form DC-1, filed online, by email, mail or fax. A $1 State Archives fee is added. Expedited review costs $25 more.

The filing generally lists the corporation's name, its registered agent and address, its authorized shares and the incorporator. Once Hawaii approves it, the corporation legally exists, and the approved document becomes the first page of your corporate records.

Bylaws are the corporation's internal rulebook: how directors are elected, how meetings are called, how votes work and what each officer does. They aren't filed with Hawaii, but banks, investors and auditors will expect to see them.

Right after approval, the initial directors (or the incorporator, if no directors were named) hold an organizational meeting or sign a written consent to:

• adopt the bylaws
• elect officers
• authorize issuing the founders' shares
• approve opening a bank account and choose a fiscal year

Record the decisions in minutes and keep them with your Articles of Incorporation in a corporate records book.

Issue shares to each founder in exchange for cash, property or services, and record every issuance in a stock ledger. Many companies now use book-entry shares instead of paper certificates.

If founders' shares vest over time, each founder should consider filing an 83(b) election with the IRS. It must be filed within 30 days of receiving the stock, and a missed deadline can't be fixed later. A stock purchase agreement for each founder documents the price, the vesting schedule and the company's repurchase rights.

An Employer Identification Number is the corporation's federal tax ID. You need one to open a business bank account, run payroll and file the corporate tax return. The IRS issues it for free, and an online application gets you the number right away. Read what an EIN is and how to get one.

What to know about how Hawaii taxes corporations:

• C corporations pay Hawaii corporate income tax (Form N-30) at graduated rates of 4.4%, 5.4% and 6.4%; the 6.4% rate applies to taxable income over $100,000.
• The General Excise Tax (GET) applies to business activity, at 4% for most activities plus a 0.5% county surcharge where adopted. A GET license has a one-time $20 registration fee.

Depending on what you sell and whether you hire, you may also need to:

• register for sales tax if you sell taxable goods or services (see our sales tax license guide)
• register for state payroll withholding and unemployment insurance before your first payroll
• get city or county business licenses, plus any professional or industry licenses your work requires

Hawaii requires the Annual Report every year.

• When it's due: By the last day of the calendar quarter in which the registration date falls (March 31, June 30, September 30 or December 31). None is due in the year of registration.
• State fee: $15

Beyond the state report, a corporation stays in good standing by:

• keeping a registered agent on file and telling the state when it changes
• filing its federal return, Form 1120, by the 15th day of the fourth month after its tax year ends (April 15 for a calendar year)
• holding the shareholder and board meetings its bylaws require, or acting by written consent, and keeping minutes
• keeping business money in its own bank account, separate from yours (see opening a business bank account)

Missing a report or fee can lead the state to revoke or dissolve the corporation, which can put your liability protection at risk. Our guide to annual reports and franchise taxes explains how to stay ahead of it, and Worry-free compliance tracks the deadlines and files for you.

State fees change from time to time. When you order through EZ Entity Setup, you see the exact state fee before you pay.

Any Hawaii corporation that meets the IRS requirements can elect S corporation status by filing Form 2553. The corporation stays the same legal entity; only its tax treatment changes, so profits pass through to the shareholders' personal returns instead of being taxed at the corporate level.

A valid federal S election is automatically effective for Hawaii income tax purposes without a separate election. S corporations file Form N-35, and nonresident shareholders must sign agreements (Schedule NS) or the corporation pays tax on their share.

Startups that plan to raise venture capital almost always stay C corporations, because an S corporation can't have more than 100 shareholders, can't have corporate or foreign shareholders and can issue only one class of stock. The Hawaii S corporation guide covers that path step by step.