The process of establishing a new business is referred to as incorporation, which is a term used in the world of business. When a corporation becomes established, it is allowed under the law to be referred to as a business entity. This means that the business is financially and legally distinct from its founders or owners. It is beneficial to have an understanding of the definition of incorporation because it is a fundamental business term that is extensively used in a variety of fields. In this article, we will discuss small business incorporation work, in California, Texas, and Delaware.
What Is Business Incorporation?
Business incorporation refers to the legal procedure that is followed in order to establish a company or business. When a business is established under the laws of a particular state, the resulting legal entity is called a corporation.
To become a separate legal entity, a business must file paperwork with its state of incorporation. Even though a single person owns the company, it is nevertheless likely to have shareholders and a board of directors.
Incorporation is optional for running a business. Owners have the option of running their businesses either as single proprietorships or partnerships. Debt and taxation are handled differently for a limited liability company or a partnership than for a corporation.
Also, the ability to issue shares of stock is a key benefit of incorporation and a key difference between corporations and other legal bodies. When a business becomes incorporated, it can begin issuing shares of stock to its employees and other investors. Incorporating a business makes it possible for the owner to sell off shares of the company to third parties, which is not possible for a sole proprietorship or a partnership.
In addition, any business has the option of becoming either a corporation or a limited liability company upon incorporation. Each type of corporation has its own unique form, but the specific filing requirements will be determined by the state in which the company is based.
How Does Business Incorporation Work?
When it comes to conducting business on a global scale, corporations are by far the most common structure. Corporate formation and organization laws might vary from one jurisdiction to the next. There are, nevertheless, some constants among corporations.
- Business incorporation is the formal process by which a business is created and structured.
- Articles of business incorporation are needed to list the company’s stockholders and other relevant information.
- Their limited liability shields the owners and investors from personal responsibility for the company’s debts and actions. Also, read INCORPORATION: Meaning, Taxes, Articles & Differences.
Is Business Incorporation Necessary?
It is not necessary to establish a separate legal body in order to do business. If you don’t register your business, you’re legally operating as a “sole proprietor,” which means you’re signing legal documents and conducting business as yourself.
As a lone proprietor, you are entirely responsible for all business obligations. Personal assets not related to the business could be utilized to settle a claim if you are sued for breach of contract or personal harm. That’s bad news if you’re the owner. The same holds true for general partnerships in the absence of business incorporation. You and your partners bear equal personal responsibility for the success or failure of the business. As a result, you may have to shoulder the entire burden of blame for the activities of your business associates.
Furthermore, A sole proprietorship or general partnership is advantageous administratively because of how simple they are to manage. Initial establishment and registration expenses are negligible. Depending on where you live, the nature of your business, and the laws in your area, you may need to register your business name and/or obtain a business license before opening for business. If things aren’t going well for your company, you can often just stop doing business without filing for official dissolution. Any profit or loss experienced by a sole proprietorship or general partnership will be reported on the individual tax returns of the business owner.
Business Incorporation Procedures
There are a lot of things to do when incorporating a business, which can make the procedure appear overwhelming. However, it could be beneficial to take the extra steps necessary to form a business entity.
#1. Pick Your Location(s) of Operations and Obey All Laws
Your personal assets as a business owner are safe from legal claims thanks to the corporate structure. Establishing a business is a necessary step toward receiving funding from investors and going public. Incorporating a business involves an extensive procedure with numerous steps, each of which is crucial in its own right. A business owner must make the following choices and execute the following procedures in order to incorporate their own business.
The business should be in compliance with all applicable licensing and zoning regulations before forming a corporation. Even while not all businesses need them, it’s important to make sure you have the right licenses and permissions to open for business.
As a corollary, this may influence your choice of base of operations and/or legal entity formation. Businesses should usually incorporate in the state where their primary office is located because different states have varied filing requirements and application processes. A foreign corporation filing, for instance, could be necessary if you decide to incorporate in a state other than your home state. However, incorporating in a separate state may lessen the financial outlay and administrative burden associated with doing so.
#2. Choose a Legal Form for Your Company
Choosing a legal framework for the business is a crucial first step. A sole proprietorship, partnership, corporation, or S corporation are the most typical organizational structures for a firm. The limited liability company (LLC) is another typical business structure recognized by law.
The best business structure for a long-term company is the one that best fits the company’s long-term goals and needs. Incorporated businesses have the option of issuing stock, which allows their owners to quickly and easily liquidate a stake in the company for personal gain. Depending on the business structure, there are also major implications for taxes and responsibility.
If you’re unsure of what’s best for your business, a good first step is to talk to an attorney who specializes in business law.
#3. Pick a Unique Name
If another business with an identical name already exists in your location, you will not be able to incorporate it under that name. A distinct name is also desirable from a legal and branding perspective. Think about common incorporation abbreviations (like “Inc.” for “Incorporated”) while coming up with that one-of-a-kind moniker.
You may look up registered company names in online directories. Users can check the availability of potential usernames by entering them into these databases. When forming a corporation, business owners in some jurisdictions may be able to reserve a unique name for their company for a period of time ranging from sixty to one hundred and twenty days.
#4. Choose a Registered Agent
A company must have a person or business that is authorized to receive legal notices and deliveries on its behalf. A local licensed agent is a necessity in most states since the state has to have a point of contact for any official business that needs to be taken care of.
It’s not necessary for the business owner to serve as the registered agent. A business attorney, for instance, can act as a company’s registered agent so long as their office is located in the state where the business will be established. If the company’s registered agent leaves the state where it was originally formed, the corporation must select a new agent. For a price, you can also find online legal services that offer registered agent services.
#5. Fill Out and Submit Your Articles of Business Incorporation
General information about your business, such as: must be included in the articles of incorporation, which are a single document.
- Your company’s official moniker
- Business Location
- Business Objectives
- Responsible Party
- The total number of shares that will be issued by the company.
Your state’s secretary of state office will accept your articles of incorporation if you deliver them in person, send them electronically, or fax them. Articles of business incorporation have a filing fee of about $100.
#6. Write Your Corporate Bylaws
Businesses must also create bylaws that detail such things as how salary is to be distributed, how shares are to be issued, who has what voting rights, and how the board of directors is to function, in addition to the articles of incorporation.
The corporate bylaws provide a more comprehensive framework for running a business. Also, the bylaws of a business are frequently consulted in order to determine the correct course of action. Although copies of these are not required by law in all places, they may be necessary when dealing with certain organizations (such as opening a bank account). In addition, bylaws can also be updated to reflect the dynamic character of a company. Read: HOW TO INCORPORATE: Steps to Incorporating Your Business
#7. Establish a Board of Directors
The board members will have a number of critical responsibilities at the first meeting. It is customary for the board of directors to formally adopt the articles of incorporation and bylaws, authorize and issue stock, elect executives, and make other operational decisions at the first meeting of the board. Having a copy of the meeting minutes is also useful for those who need to refer to them later.
What Are the Advantages of Business Incorporation?
There are a number of positives that come from incorporating a legal entity that could sway your decision to choose this business structure. Knowing how business incorporation might help your organization by clearly delineating responsibilities is also useful. An incorporated business structure can also serve as a manual for staff to follow. Additionally, business incorporation has several benefits:
#1. Offers a Systematic Method of Reporting
Having a formal organization in place helps offer staff a clear chain of command. When working for a business, employees may have more clear lines of authority and accountability than they would as a lone proprietor. No matter what position someone holds in a company, they can benefit from a better understanding of how their work connects to the larger strategic objectives of the firm. In addition to helping employees understand who they should report to for assistance, a well-defined organizational structure aids in team building.
#2. Instant Credibility
Having your business formally recognized as an entity through incorporation can be a huge confidence boost. Everyone you approach for funding, loans, supplies, clients, or employment will quickly see your seriousness and long-term focus.
However, there is a greater investment of time and money necessary to form a business. Accounting documents for a corporation must be kept at a location independent of the owner’s personal finances. Separate financial statements and tax returns, as well as yearly registration costs, are also required of corporations.
If you want your business to flourish in the long term, the challenges you face on the way there are necessary sacrifices to make.
#3. Provides Structure and Harmony
There is value in having a formal organizational structure in place so that staff know their specific responsibilities. Each worker is given an equitable share of the tasks they are capable of completing, promoting fairness and harmony in the workplace. Having an understandable structure in place makes it easier to assign specific responsibilities to each employee, preventing situations like “busy work” in which one worker is given the bulk of the day’s work.
Also, managers in businesses typically oversee a smaller group or division inside the company rather than the complete enterprise itself.
#4. Boost Teamwork and Open Lines of Communication
Business incorporation has many benefits, one of which is that it can inspire employees to talk to one another more often, which in turn can boost productivity. Productivity levels may increase if each worker is aware that another member of the team or department is waiting for them to finish their task. A corporation’s organizational structure can also facilitate better communication between employees of different departments inside the company.
#5. Minimize Legal Accountability
A corporation protects its owners and founders from personal liability in the event of legal action taken against the company as a result of its operations. This may prove useful in circumstances in which the company may experience problems with its liquidity. For instance, if an individual proprietor of a limited company does not have the cash flow necessary to cover the company’s debts, it is not the person proprietor’s legal responsibility to make the repayments. It is against the law for creditors to utilize the personal property of a business owner as collateral for debts taken out against their limited company.
What Are the Disadvantages of Business Incorporation?
Business owners should be aware of the numerous disadvantages that accompany incorporation, including the following:
#1. Procedures and Costs
There is a lot of work and expense involved in the legal process of incorporating a business. These cumbersome processes have been put in place to weed out the casual and disinterestedness of the business world.
After a firm emerges, tight management and administration are still required. As required by the Companies Act and any applicable laws. The Registrar of Companies is the place where the required returns and other documentation must be filed.
The provisions of the Companies Act stipulate that certain events and activities, such as accounts, corporate audits, meetings, borrowing, lending, investment, and the issue of capital, dividends, etc., must be done and carried out.
In addition, a corporation is subject to a wider range of regulations than other types of business.
#2. Discrepancy Between Ownership And Management
Companies with a small number of stockholders tend to be controlled by their larger shareholders.
When there are a lot of individuals working for a corporation, it’s difficult for any one person or even a small group to make significant changes.
Therefore, the status of ‘ownership’ of the corporation is merely a phrase with no practical importance. They are not involved in the daily operations of the business nor do they have complete authority over it.
#3. Greater Civic Engagement
Hundreds of thousands of people are employed by the many corporations that have a net value in the billions of dollars. Large corporations like these typically engage in community service as part of their CSR (corporate social responsibility) initiatives because of the profound impact they have on people’s lives.
Large publicly traded corporations have enormous societal impacts and are thus held to specific social norms and expected to make positive contributions to society’s growth.
#4. Heavy Taxes May Apply
Incorporated businesses face a higher tax burden than unincorporated ones. If a business is incorporated, it does not qualify for any tax breaks or minimum taxable thresholds.
In addition, a corporation must pay income tax on its entire profit at a predetermined rate, whereas unincorporated businesses face a sliding scale of taxation.
As a result, many businesses begin as sole proprietorships or partnerships. To accommodate their expanding operations, they decide to incorporate.
#5. Business Disclosing
Even if there is a comprehensive legislative framework in place to ensure maximum transparency and disclosure of business information, employees and lower-level members of the organization have limited access to the company’s information and upper management.
When to Incorporate?
It’s important to consult with experts like lawyers and accountants before deciding whether or not to incorporate a business. Incorporating is often done for the following reasons:
#1. Incorporate Immediately When Professionals Advice You
There are certain types of enterprises that, due to their inherent riskiness, should almost always be run as corporations. If you provide your attorney or accountant with a summary of your company, they should be able to advise you on whether or not it is in their professional judgment necessary to incorporate your business.
If you have significant assets outside of the firm, such as other business interests or a residence, that you want to shield from debts or obligations associated with the business, your lawyer or accountant may advise you to incorporate them as a preventative precaution.
#2. Incorporate If/When You Plan to Raise Capital
The return on investment is of paramount importance to intelligent investors, and they expect to receive a fair cut of the company’s profits in exchange for their capital. As opposed to unincorporated enterprises, corporations have a considerably easier time providing this assurance. For generations, we’ve been keeping track of a company’s profits, deciding who gets what share of the company’s control, and settling disagreements about the meaning of contracts involving those companies.
Investors that take their business seriously are more likely to put their money into a corporation. The date of a company’s incorporation varies depending on the nature of the business at hand and the preferences of the investors involved. In most cases, business incorporation is a condition of the business transaction.
#3. Incorporate Before Recruiting a Full-Time Employee
Businesses are governed in a variety of ways. Since the work connection is so central to people’s social lives, it’s one of the most nuanced and intricate ways in which they express their values and principles. Consequently, the knowledge required to run your firm and the potential risk of being non-compliant both increase dramatically the moment you hire your first person.
In addition, there are situations in which your company could be held liable for the employee’s activities. If you haven’t formed a corporation, your personal assets could be at risk if things go wrong with the company.
#4. Incorporate as Your Company Grows in Size or Complexity
The more successful a company becomes, the more sources of danger it faces. The number of clients to whom you ship goods is growing. When you start selling your services to more affluent people, they have more to lose if something goes wrong and are more likely to sue if something does go wrong. You are luring in dishonorable people.
By forming a corporation, you can shield your personal assets from liabilities that more rightly belong to the company you’re running.
In the United States, many companies with annual revenue over $100,000 opt to incorporate. However, the definition of “material size” is a subject best discussed with an accountant.
Texas Business Incorporation
Texas, one of the most business-friendly states in the country, provides companies that meet specific requirements with a number of business and tax benefits.
For instance, the Texas Enterprise Fund (TEF) offers “deal-closing” subsidies to businesses that are seriously contemplating locating a new project in Texas or another state. The business must be stable financially and in a cutting-edge field to have viable alternatives in other parts of the country or even the world.
Creating a Texas company may be the best option for most entrepreneurs who want to launch a larger business. If your company is a corporation rather than an LLC, it can invest and reinvest surplus funds more freely. Shareholders can claim corporate income and losses on their personal tax returns and pay the standard rates.
Texas Business Incorporation Procedures
In Texas, prospective business owners can form their companies under a variety of legal frameworks, including for-profit and nonprofit corporations. By deciding on a company name, picking a registered agent, appointing directors, and submitting a Certificate of Formation, you can form a corporation in Texas. Furthermore, if you already have a company in another state but want to do business in Texas, your foreign business may need to be registered with the state.
#1. Get Legal Advice
Choosing a company structure is a major decision that often feels overwhelming. However, if you consult with an attorney, you will be able to discuss your goals for the corporation and the operation of your firm, and the attorney will be able to advise you on the best structure to achieve those goals.
- Get referrals from people you trust in order to discover a good business lawyer. In the course of their professional and personal lives, many people will interact with business attorneys. If they have personal experience with one, they should be able to share their impressions with you.
- If you can’t seem to find a lawyer on your own, contact the bar association in your state for a referral. You should be able to locate a knowledgeable and trustworthy lawyer using these resources.
#2. Pick a Distinct Name for Your Company and Register It With Your State
Each Texas business must think of a unique name that isn’t already in use by another corporation in the state. Get some inspiration for a company name by using a handy Business Name Generator. The Texas Corporation Names website has all the information you need regarding the specific naming requirements that must be met.
Also, you should check the availability of the name in Texas after you’ve settled on one. Find out if another company in Texas is using your proposed trade name by performing a Texas entity search using our convenient tool.
The website of the Texas Secretary of State allows for name searches as well. You must sign into the state’s web portal in order to use this service.
#3. List Your Company’s Official Address
A Texas business incorporation must have a registered office. If you’re conducting the business out of your home, this would be your home address; otherwise, it could be the address of a commercial building where you have an office, or somewhere else. You’re free to use a Post Office Box or an address outside of Texas.
A virtual mailbox could be another option for your company’s mailing address. Incfile offers Texas virtual mailbox services, where we’ll collect your mail, scan it, and upload it to our servers for you to peruse online. This is helpful if you operate a business from home but don’t want your home address included in official business records.
#4. The Texas Secretary of State must receive your Certificate of Formation
You can get your Texas Certificate of Formation by filing a form with the Secretary of State once you’ve gathered all the necessary information for your corporation. In doing so, you will formally establish your company.
You can pay an extra $5 and submit your Certificate of Formation electronically using the state’s online portal. The Secretary of State’s office accepts forms submitted in person, via mail or fax, or electronically through Incfile. The cost of business incorporation in Texas is $300.
Although the Texas Certificate of Formation only needs to be filed once, annual reports, public information reports, and the TX franchise tax (if applicable) must be filed and paid thereafter. You can rely on Incfile to remind you annually, or we can take care of the necessary formalities on your behalf.
#5. Register with the IRS for an Employer Identification Number (EIN)
Obtaining an Employer Identification Number (EIN) from the Internal Revenue Service is mandatory. This is the number you’ll need to open a company checking account, submit payroll information and payments to employees, and pay taxes. You can get one from the IRS on your own, or Incfile will get one for you when you incorporate in Texas.
#6. Produce a Set of Governing Documents
The bylaws of a corporation outline the procedures for running the business, including the number of board members, the frequency of board meetings, and the conditions for shareholder approval.
In some jurisdictions, a company must have bylaws in place. Contracts aren’t necessary in Texas, but they’re a smart idea for company protection.
Business Incorporation Delaware
Which factor unites 68% of the Fortune 500 and 93% of all IPOs in the United States? Almost all of them share the same unremarkable brick building on North Orange Street in Delaware, where registration takes place.
In this world, nothing can be said to be certain except death and taxes, as Benjamin Franklin once put it (unless you’re a Delaware corporation, in which case only the former holds true). Maybe that’s not the precise quote, but you get the idea: there are major tax benefits to business corporations in Delaware
Why Do So Many Companies Incorporate in Delaware?
In 2020, approximately 1.6 million businesses were registered in Delaware, up from 1.5 million the year before. Companies like Amazon, Google, Tesla, Walmart, American Express, and Disney have made Delaware their “home” and given the state a reputation as a haven for businesses across the world.
It may seem strange that Delaware, the second-smallest state in terms of area, and one of the least populous, became the business hotspot it is today, but the state has been offering incentives to businesses since the early 1900s, including low taxes, few regulations, and easy incorporation. The advantages of business incorporation in Delaware include tax breaks, anonymity, speed, efficiency, a less complicated organizational structure, and access to the Corporation Court.
Advantages of Business Incorporation in Delaware
#1. Tax Breaks
Companies from all over the world have taken notice of Delaware because of the state’s relatively low corporate tax rate. Companies that have a Delaware registration but conduct no business within the state are exempt from corporate income tax in Delaware. In addition, there are no taxes on sales, investment income, inheritance, or personal property in Delaware. Companies that choose to incorporate in Delaware will be subject to a franchise tax, but this fee may be negligible compared to the income tax requirements of other states.
Even if a national company has a physical presence in Delaware, it can avoid paying state income tax thereby setting up a “shell company” to house its intangible assets.
#2. Security
In the majority of jurisdictions, businesses must appoint a “registered agent,” an individual or organization with a physical address, to act as the legal entity’s point of contact for receiving legal notices and other documents. However, unlike in most states, only the registered agent’s name needs to be made public in Delaware. There is no need for other officials and directors to reveal their identities because they are not identifiable. This lack of disclosure means that officers, directors, and shareholders need not even be residents of Delaware.
#3. Quickness and Straightforward Organization
The ability to process business filings on the same day is something that Delaware is proud of. Incorporating a business typically takes less than an hour. The state of Delaware permits a single individual to serve as an organization’s officer, director, and even shareholder. This is typically only possible in other states by operating as a sole proprietorship or limited liability company.
Should Delaware Be Your Incorporation’s Home?
It would appear that incorporating your firm in Delaware is a no-brainer in light of these benefits. In fact, if you want to attract investors from the VC and angel communities, you should form your company in the state of Delaware.
However, few startups actively seek venture money. It is more practical for ordinary small business owner to register their company in their home state. It’s possible that your industry isn’t suitable for the substantial tax breaks and other advantages of Delaware incorporation. After all, there are potential drawbacks as well.
California Business Incorporation
Incorporating your business is a smart move that will help you protect your company’s future. You have a say in which state or province your firm will be incorporated. Many business owners find that it is advantageous to incorporate in California even if they are not based there.
Why Incorporate in California?
By forming a corporation, you can shield your personal assets from claims that could jeopardize your company. You’ll appear more credible to potential clients and partners with the formality of a corporation. There are a variety of factors that influence a company’s decision to incorporate in a different state. Because of its robust business culture and advantageous company regulations, California is a top choice for incorporation. The management structure of a California corporation is highly adaptable because the state requires just the president, the chief financial officer, and the secretary to be included in the Articles of Incorporation. The same person can serve in all three of these roles. This gives you a great deal of leeway in deciding how to structure the future leadership of your company.
Because stockholders and executives can remain anonymous, incorporating a California professional corporation is another good option. Only the company’s director and resident agent need to be registered with the state, so shareholders can avoid having their personal information made public.
At the end of the day, the state of California only taxes corporations at a rate of 9%, and different types of corporations can take advantage of even more tax breaks.
California Business Incorporation Procedure
Creating a legal business entity in California is simple. Here’s a quick rundown of the business incorporation in California procedure:
- Verify if the company’s name is acceptable in accordance with California law.
- Submit articles of incorporation in the Golden State.
- Hold a meeting to establish company policies and procedures.
- Open a bank account for your newly formed corporation and apply for a FEIN.
- Obtain necessary permits from the local government in the area where your company will operate.
- You have 90 days to file your first report, a Statement of Information.
Choosing a name for your company is the first step in getting it off the ground. Incorporate.com would gladly check to see if your proposed company name is already in use in your chosen state. Then, we’ll fill out the necessary paperwork to secure the name of your business.
After that, you can move on to drafting your articles of incorporation. A corporation in California must have at least three directors unless no shares have been issued, in which case the minimum number of directors is reduced to one or two. There need only be one director if there is only one shareholder. Having two shareholders means you’ll need two directors. If there are three or more shareholders, then there should be three directors. The law does not impose any restrictions on the individuals who are eligible to serve on a board of directors.
Within the first 90 days after your business incorporation in California, you must submit an informational statement. To meet the filing requirements in California, your corporation must have a general purpose that allows it to engage in any lawful activity.
What Is the Consequence of Incorporation?
When an organization becomes a corporation, it gains the ability to exist independently of its members and to do so indefinitely after it has achieved “perpetual succession,” which occurs at incorporation. A group that has chosen to incorporate must use a standard seal. The article Powers of Incorporated Associations elaborates.
Conclusion
In conclusion, companies with more complex operations that want to raise more cash, have their owners avoid personal liability and take advantage of specific tax incentives may choose to incorporate and run under a different legal framework.
There are long-term, strategic benefits to expanding beyond being a sole proprietor or partnership, despite the fact that business incorporation is more expensive and needs more time to manage administrative matters.
Frequently Asked Questions
Who is a shareholder of a company?
A shareholder is any individual, corporation, or organization that owns stock in a company. A corporation shareholder may own as little as one share. As residual claimants on a company’s profits, shareholders are susceptible to capital gains (or losses) and/or dividend payments.
Is the CEO of a company a shareholder?
No. Even though the CEO is also the company’s largest shareholder, that is not the case in most publicly traded businesses. The total value of a large corporation’s shares, or its market capitalization, can be in the hundreds of billions.
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