Incorporation is a key decision many business owners make to structure and take their businesses to the next level. It comes with a lot of planning and careful steps. But how do you decide if incorporation is the best step for your business? This post will explore the meaning of incorporation, the steps to incorporating your business, the pros and cons of incorporation, articles of incorporation, and incorporation tax.
What Does Incorporation Mean?
Incorporation is the process of organizing and establishing a business. A business can raise money, sell shares, and divest ownership of a piece of the company more easily. Also, to become a corporation, a business writes and files articles of incorporation with the government. These articles are legal proof that the corporation was created.
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. Additionally, a new company with stock shares is formed by incorporating, making it easier for the company to get investors from outside.
Steps to Incorporating a Company
An incorporated corporation is a legally recognized independent legal entity. The incorporated companies are distinguished by phrases such as “Inc.” or ‘Limited.” in their names. Also, they become a corporate legal entity distinct from their owners.
Incorporating a company involves several steps; also, the process can differ depending on the state and type of corporation. Here are the steps to incorporating a company:
#1. Decide on a Business Structure
Before you incorporate a business, you need to know the financial, legal, and management benefits of doing so. Once you have decided that incorporating is the right step for your business, you can choose the structure that best suits your needs.
Choosing a business structure is crucial, and if you need help deciding a structure, you can contact a business attorney. Also, most businesses are sole proprietorships, partnerships, or corporations. But when deciding on a business structure, think about long-term strategies and operations
#2. Comply with Licensing and Zoning Laws
Before incorporating a business, ensure it fits your area’s licensing and zoning laws. This step is necessary to avoid compliance issues once you establish your corporation and begin running your business.
Before incorporating, check the local licensing and zoning requirements because though not all businesses need permits or licenses, some do.
#3. Choose the State Where You Want to Incorporate
Select the state where you want to incorporate your business since incorporation is regulated at the state level, and cities might have added requirements.
You should talk to your secretary of state’s office and a lawyer about your options to ensure you follow the rules in your area.
#4. Choose a Name for Your Corporation
Choose a unique name for your corporation while adhering to the state’s naming guidelines. The name should not be similar to any other corporation’s name in the state.
Avoid trademark infringement and branding confusion with a distinctive name. Keep incorporation abbreviations like Inc. and Ltd. in mind when choosing a unique name.
Furthermore, online directories can search for business names. These directories let users search for desired names. Several states allow incorporation applicants to reserve a name for 60–120 days.
#5. File Articles of Incorporation
File the Articles of Incorporation with the secretary of state’s office in the state where you want to incorporate. Articles of incorporation filing requirements vary by state. A company’s name, location, public or private shares, registered agent, and incorporator are all listed in the articles of incorporation.
#6. Draft Corporate Bylaws
Draft corporate bylaws that outline the corporation’s rules and procedures. In addition to the articles of incorporation, the bylaws usually have information about how the company runs, how shares are insured, how voting works, and how shareholder meetings are run.
A firm often consults its bylaws to determine its best course of action, which can also be changed to adapt. Some other entities may need these, like financial institutions, and they may require bylaws when setting up a bank account
#7. Obtain Necessary Business Licenses and Permits
After incorporating, apply for the appropriate licenses and permits in your state. Check with your state to see if they have any additional requirements.
Incorporating a business can take one to six weeks, and costs differ depending on the company’s location. Incorporating offers several benefits, including personal asset protection, tax advantages, deductible expenses, credibility and maturity, name protection, and longevity
#8. Hold Board Meetings
Board members will execute crucial activities at the first meeting. During the first meeting, the board should decide about adopting the articles of incorporation and bylaws, allowing and issuing stock, electing executives, and making other operational decisions. Meeting minutes are necessary because some entities may need a copy.
#9. Finish Extras
Business owners should perform various operational responsibilities after incorporation. Companies should apply for an employer identification number, open a bank account, file federal taxes, announce their incorporation, file annual reports—also Issue stock to the shareholders. The shares represent ownership in the corporation, and the shareholders elect the board of directors.
The Pros and Cons of Incorporation
Incorporation is the legal process of forming a company as a corporate entity, and it comes with its own distinct set of pros and cons. The following are the advantages and disadvantages:
Cons of Incorporating a Business
- It often requires more time to meet reporting, filing, and regulatory requirements to incorporate a business
- Due to fees and legal costs, incorporation may be a more expensive type of business structure.
- The company’s bylaws and board limit its flexibility.
- Certain funds may be double-taxed by the corporation and shareholders.
Pros of Incorporating a Business
- Incorporated businesses may achieve a lower tax rate than personal income.
- Incorporation enables a company to issue and trade shares, allowing for easy ownership transfer to another party.
- Incorporated businesses can take risks that make growth possible without exposing the shareholders and owners to personal financial liability.
- Selling shares may make raising funds easier.
Articles of Incorporation
Articles of incorporation are also referred to as the “corporate charter,” “articles of association,” or “certificate of incorporation.” The purpose of the articles of incorporation is to form a corporation legally. When incorporating, businesses must file articles of incorporation.
The filing submits information to a state agency, determining whether the corporation can be recognized as a formal company. These documents are significant and legally required for incorporation. They must be filed with the Office of the Secretary of State in the state where the business chooses to incorporate. The following items are typically included in the articles of incorporation:
- Type of corporate structure (e.g., profit corporation, nonprofit corporation, non-stock corporation, professional corporation, etc.)
- Duration of the corporation, if it wasn’t established to exist perpetually
- Name, signature, and address of the incorporator, who is the person in charge of setting up a corporation
- Purpose of the corporation
- Provisions outlined in a company’s articles of incorporation may include the limitation of the directors’ liability, actions by stockholders without a meeting, and the authority to call special meetings of stockholders.
What are Examples of Incorporations?
Incorporation is the legal process of forming a corporate entity or company. It is a way of formally organizing and officially bringing a business into existence. A corporation is identified by the use of terms such as “Inc.” or “Limited (Ltd.)” in their names. Examples of incorporations are:
- Creating a corporation or a limited liability company (LLC)
- Filing articles of incorporation with the Office of the Secretary of State in the state where the business chooses to incorporate
- Forming a C Corp or S Corp
- Obtaining a legal identity for a company
Is Incorporation the Same as LLC?
Incorporation and LLC are not the same, but they are both legal business structures. Incorporation refers to a business that functions separately from its founders or owners. On the other hand, LLC refers to a hybrid entity combining a corporation’s advantages and a sole proprietorship or partnership.
The creation and management of an LLC are much easier and more flexible than that of a corporation. LLCs are created under state law, so forming one depends on the state where it is filed. On the other hand, a corporation’s formation process requires more paperwork than that of LLCs, and they must have bylaws
.One of the main differences between LLC and incorporation is ownership. The owners of an LLC are called “members,” and each member owns a designated percentage of the company, sometimes called a “membership interest.” In contrast, corporations issue shares of stock to their owners, who are called shareholders.
What are the Three Types of Incorporation?
There are various types of incorporation, but the most common ones are a C Corporation, S Corporation, and a Limited Liability Company (LLC). Here are the three types of incorporation:
#1. C Corporation
This is the most common form of incorporation among businesses and contains almost all the attributes of a corporation. Owners receive profits and are taxed individually, while the corporation is taxed as a business entity.
This type of incorporation gives its owners limited liability protection. This means that the owner’s assets are safe from the debts and liabilities of the company.
#2. S Corporation
S Corporation is similar to the C Corporation but has some taxation differences. For taxation, S Corporations are taxed as pass-through entities, which means that the profits and losses of the business are passed through to the owners’ tax returns.
This type of incorporation is limited to 100 shareholders and requires that all shareholders be U.S. citizens or residents.
#3. Limited Liability Company (LLC)
LLC is a type of business entity that is a mix of a corporation and a partnership. It provides limited liability protection to its owners but is taxed like a partnership. LLCs don’t have to hold meetings for their shareholders or follow the same rules as corporations.
This type of incorporation is popular among small businesses because of its flexibility and simplicity.
Note that the type of incorporation that is best for your business depends on various factors, such as;
- The size of the business
- The number of owners
- The level of liability protection needed
- The tax implications
It is recommended to consult with a business attorney or tax professional to determine the best type of incorporation for your business.
What is the Difference Between an Incorporation and a Corporation?
The terms “corporation” and “incorporation” are closely related but have distinct differences. The main difference between the two is that corporation refers to a type of business entity, while incorporation refers to the process of creating a corporation.
Here are some key differences between a corporation and incorporation:
#1. Process vs. Product
Incorporation is the process of making a business a corporation. It is also the name for the legal steps that must be taken to register a business as a corporation. On the other hand, a corporation is the end product of that process, and a corporation exists after obtaining the certificate of incorporation.
#2. Legal Entity
Incorporation creates a new legal entity separate from its owners or shareholders, safeguarding them from personal liabilities. A corporation is a separate legal entity with privileges and liabilities distinct from those of its members.
#3. Entity Structure
When a business is incorporated, it takes several legal steps to protect the interests of the owners and shareholders. It protects them and deals with taxation, retirement funds, transferable ownership, credit ratings, etc. Once formed, a corporation’s main goal is to run day-to-day operations, carry out long-term strategies, and make money for its owners.
Incorporation Tax
Incorporation tax is the tax corporations pay to the government on their profits. When a corporation is formed, the prospective shareholders exchange money, property, or both for the corporation’s capital stock.
Incorporation can provide two tax benefits :
- Lower tax rates: Incorporating a business can result in lower tax rates for the corporation and its shareholders.
- Tax deductions: Corporations can deduct certain expenses, such as health insurance premiums and retirement contributions, that unincorporated businesses cannot.
The major disadvantage of incorporation tax is double taxation which can be avoided by choosing the right entity when incorporating a business.
There are several advantages incorporation tax provides, but it is important to consider the potential disadvantages as well. It is recommended to consult with a tax attorney before deciding on incorporation.
- INCORPORATING A BUSINESS: Meaning & How to Do It Effectively (Detailed)
- PRIVATE CONTRACTOR: DEFINITION, HOW TO BECOME ONE, SALARY AND JOBS
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