Incorporation
refers to the process of creating a new legal entity that is separate and
distinct from its owners. It is a popular business structure in which a company
becomes a legal entity, separate from its owners, and is able to conduct
business and make contracts in its own name. Incorporation provides a range of
benefits to business owners, including liability protection, tax advantages,
and greater access to capital. In this article, we will explore what
incorporation means, the different types of incorporation, the process of incorporation,
the advantages and disadvantages of incorporation, and other important
considerations.
What
is Incorporation?
Incorporation
is the process of creating a separate legal entity that is recognized by the
state in which it is formed. This legal entity is known as a corporation and
has its own legal rights and obligations, separate from those of its owners.
The process of incorporation involves filing articles of incorporation with the
state and paying a fee. Once the state approves the articles of incorporation,
the corporation is officially created.
Types
of Incorporation:
There
are several types of incorporation that a business can choose from, including
the following:
1.
C Corporation: A C corporation is
the most common type of corporation. It is a separate legal entity that is
taxed separately from its owners. It is also subject to corporate income tax.
2.
S Corporation: An S corporation is a
type of corporation that allows the company to avoid double taxation. Instead,
the company's profits are passed through to its shareholders, who are then
taxed on their individual tax returns.
3.
Nonprofit Corporation: A nonprofit
corporation is a type of corporation that is established for a charitable,
educational, or religious purpose. Nonprofit corporations are exempt from
paying federal income taxes.
4.
Professional Corporation: A
professional corporation is a type of corporation that is formed by
professionals, such as doctors, lawyers, and accountants. The purpose of a
professional corporation is to limit the liability of the professionals.
5.
Benefit Corporation: A benefit
corporation is a type of corporation that is formed for the purpose of creating
a positive impact on society. Benefit corporations are required to consider the
interests of all stakeholders, not just the shareholders.
Process
of Incorporation:
The
process of incorporation varies depending on the state in which the business is
formed. However, there are several steps that are common to all states. These
steps include the following:
1.
Choose a business name: The first
step in incorporating a business is to choose a name for the company. The name
must be unique and not already in use by another business.
2.
Draft articles of incorporation: The
next step is to draft articles of incorporation. These are legal documents that
outline the purpose of the corporation, the name of the corporation, the number
and type of shares of stock that will be issued, and other important details.
3.
File articles of incorporation: Once
the articles of incorporation have been drafted, they must be filed with the
appropriate state agency. In most states, this is the Secretary of State's
office.
4.
Pay incorporation fees: There is a
fee associated with incorporating a business. This fee varies depending on the
state and the type of corporation being formed.
5.
Draft bylaws: After the corporation
has been officially formed, the next step is to draft bylaws. These are
internal rules that govern how the corporation will be run.
6.
Hold initial board of directors
meeting: The board of directors is responsible for managing the corporation.
The first board of directors meeting should be held shortly after the corporation
is formed.
7.
Obtain necessary licenses and
permits: Depending on the nature of the business, there may be additional
licenses and permits that are required in order to operate legally.
advantages and disaventages of incorporation
Incorporation is the process of forming a new legal entity
known as a corporation. This entity is separate from its owners or shareholders
and has its own legal rights and obligations. There are several advantages and
disadvantages of incorporation that should be considered before deciding
whether to incorporate a business.
Advantages
of Incorporation:
1.
Limited liability: One of the main
benefits of incorporation is that it provides limited liability protection to
the owners or shareholders of the corporation. This means that their personal
assets are protected from the debts and liabilities of the business.
2.
Perpetual existence: A corporation is
considered a separate legal entity from its owners, which means that it can
continue to exist even if the owners or shareholders die or sell their shares.
3.
Tax benefits: A corporation may be
able to take advantage of certain tax benefits, such as deducting business
expenses from its taxable income, and potentially paying lower tax rates than
individuals.
4.
Easier to raise capital:
Corporations can raise capital by selling shares of stock, which can be
attractive to investors looking to invest in a business with potential for
growth.
Disadvantages
of Incorporation:
1.
Increased costs and complexity:
Incorporation involves more paperwork, legal fees, and ongoing compliance
requirements than other business structures. This can result in higher costs
and more administrative work for the owners or shareholders.
2.
Double taxation: Corporations are
subject to double taxation, which means that the business is taxed on its
profits and shareholders are also taxed on any dividends they receive. This can
result in higher taxes for both the business and its owners.
3.
Loss of control: When a business is
incorporated, ownership is divided into shares, which can be bought and sold by
investors. This can result in a loss of control for the original owners or
shareholders.
4.
Increased regulation: Corporations
are subject to more regulations and oversight than other business structures, which
can be a disadvantage for smaller businesses that may not have the resources to
comply with all of the requirements.
Overall,
incorporation can be a good option for businesses that are looking for limited
liability protection, the ability to raise capital, and potential tax benefits.
However, it may not be the best choice for all businesses, particularly those
that are smaller or have simpler operations.
