When you incorporate your business, a new legal entity comes into existence that is separate from the business itself. One definition of an "incorporated" business is one that operates independently of its owners. When you incorporate your business, it gets most of the legal rights that an individual has, except for the right to vote.
What does it mean to incorporate your business?A corporation or company can only exist after going through the formal procedure of incorporation. The result of this is a legal entity called a corporation, which keeps the firm's assets and income separate from its owners and investors. The creation of corporations can be in almost every country in the world, and their names usually include words like "Inc." or "Ltd." to show that they are corporations. It is the legal process of setting up or incorporating your business as a separate entity from its owners.
Is incorporation necessary?To run a business, you don't have to incorporate. If you don't, your business is a "sole proprietorship." This means that you sign contracts and do business as an individual. As a sole proprietor, you are responsible for all contracts and debts your business makes. As the owner, that's not good news. Suppose you bring on a partner in a general partnership without incorporating. You and your partner agree to be personally responsible for all parts of the business. The good thing about a sole proprietorship or a general partnership is that they are easy to set up and run. There aren't many or any costs to start-up or register. You may also need to register the business name and/or get a business license first. You also don't have to legally dissolve the business if you decide it's not working out. In many cases, you can just stop doing business. Any income or loss from a sole proprietorship or general partnership will be reported on the owner's personal tax return. There are a few good arguments in favor of including it.
1. Unlimited life.Unlike sole proprietorships and partnerships, a corporation is not tied to the life of a single person or group of people. It can go on forever until it reaches its goal, merges with another business, or goes out of business.
2. Transferability of shares.Having the option to transfer ownership of a business to a loved one is a great feeling. It can be hard and expensive to get rid of your ownership in a sole proprietorship or a partnership. When the owner of a piece of property changes in any way, there must be a change in the title. There must be a new deed, and other administrative steps must be taken. In a corporation, the display of each owner's rights and privileges is by the number of shares of stock they own. To swiftly and conveniently transfer shares in a company, shareholders should use the space provided on the back of their stock certificates to endorse and sign over the shares in question.
3. Having the ability to get money to invest.Because of limited liability and how easy it is to sell shares, it is usually much easier to get new investors to join a corporation. New investors directly get shares of stock, or brokerage firms and stock exchanges can utilize when there are a lot of shares to sell to the public.
How to Incorporate your Business?You form a corporation by following the rules and laws of your city, state, and federal government. Even though each department has its own process, the general methods are still the same. When you incorporate your business, you have to do things like:
- Write your company's bylaws.
- File your Articles of Organization or Incorporation
- Put together your executive team.
1. Check to see if our business name is available.One of the first things to do when starting a business is to come up with a name and make sure it is available. If you want to start a new business, you'll need to come up with a unique name for it. An effective business name serves two purposes:
- It helps people to remember your company
- It conveys some information about what you do.
2. Choose a Location for your Main Office.Assuming you've found a catchy and unique name for your firm, the next step is to settle on a permanent location for your headquarters. The easiest option would be to pick the state where you now reside and conduct most of your business. But technically, you can have your headquarters anywhere, which means you can incorporate in other states. Because it prioritizes and favors companies, Delaware has become the most popular state in which to incorporate.
3. Pick the kind of legal entity you want to create.Now is the time to choose what kind of business you want to open. There are three types of companies with limited liability: C corporations (C corps), S corporations (S corps), and limited liability companies (LLCs). LLCs are not technically corporations, but they are like corporations in many ways. Below, we talk about the three different kinds of limited liability corporations.
C corp.The vast majority of large companies are C corps. Each one exists independently from its owners as a distinct entity under the law. There is an allowance for C corporations to open bank accounts, go to court, get credit, and buy property.
S corp.S corps are like C corps, except for how many shareholders they can have and how they are taxed. Only 100 people can be shareholders. They offer pass-through taxation, which means that shareholders will only have to pay taxes once instead of twice on their personal tax returns.
LLC.Pass-through taxation is possible for both single-member LLCs and LLCs with more than one member. They also give personal liability protection to member-owners, which protects their personal assets in case of financial trouble or legal action by someone else.
4. Choose or Name your Board of Directors.Every corporation needs to select its own board of directors. The board of directors oversees daily operations and long-term goals. So, your board of directors should have knowledge of the industry, great leadership and management skills, and a commitment to doing what's best for the business.
5. Name a registered agent.A registered agent can get mail for your business and send it to the right place. If you want to get official state mail, you must have a registered agent. Directors and owners can also choose a third party who is not part of the business to be the registered agent. As a registered agent, you can also choose the owner of the business, an officer, or another employee. But the person you choose usually has to live in the state where you incorporate.
6. Put your Articles of Organization or Incorporation on file.Articles of incorporation are legal papers. When you start your business, you have to send it to your state. It tells about the name, purpose, location, and board of directors of your business. You can get a blank form for your articles of incorporation:
- From the Corporate filing office in your state.
- From the government website for your state.