What Is Incorporation Definition Law?
Incorporation definition law refers to state and federal laws surrounding the act of incorporating a business.3 min read
Incorporation definition law refers to state and federal laws surrounding the act of incorporating a business. There are some legal requirements for any corporation formed in the country and some that are state specific.
What Is Incorporation?
When a business decides to form a corporate structure or company, the process is called incorporation. Corporations, by definition, are completely separate entities from their owners. This separation is called the corporate veil, and it offers a level of liability protection to the owners and shareholders in a corporation.
Corporations, because they are viewed as their own legal entity, have many of the same rights and responsibilities as an individual, including:
- Paying taxes
- Owning property
- Filing suit
- Being sued
- Taking out loans
Most countries recognize corporations as legal business entities, and they are the most popular form of business structure. They can usually be identified by their business names which include some form of corporate marker like the words "incorporated" or 'limited."
When a business owner decides to start their own company, they have a few choices when it comes to their structure. The best fit for business structure depends on the long term goals of the company, its size, and desire for growth.
Corporations are formed when a business owner files articles of incorporation with the state in which they plan to conduct business. Most other types of business entities can choose to incorporate once they've already been formed. If a business owner originally started a sole proprietorship, but they decide that they want to incorporate, they can do so by following their state's rules and regulations for the process and filling out the appropriate documentation.
When a business changes structure from a sole proprietorship to a corporation, the owner or owners are afforded liability protection.
Many entrepreneurs choose to form corporations because such a structure tends to be more well-known and respected among other companies as well as customers or clients, both current and potential.
There are many advantages to incorporating a business. One of the biggest draws of incorporating is the fact that an incorporated company can be held liable for debts and legal obligations apart from its owners. If the corporation is sued, the assets of the owners are not liable in the suit. However, because a corporation can own its own assets and property, creditors and courts can go after anything the business itself owns.
Shareholders invest in a corporation creating financial ties, to a point. In the event of legal or financial trouble with the corporation, its shareholders can only lose as much as they put into the company, basically their amount of investment, but they don't need to worry about their personal finances or assets.
The corporate structure offers several other advantages, including:
- Ease of ownership and investment transfers
- Option to sell shares
- Different stock options
- Opportunities for growth through local and global stock offerings
- Highly structured business management
The vast amount of stock options coupled with the protection of the corporate veil offer corporations the chance to take risks that could lead to massive success without worrying about putting their owners, stockholders, or board of directors in financial or legal trouble.
Cons to Incorporating
One of the most commonly-known disadvantages of incorporating is the issue of double taxation. Because a corporation is viewed as a separate legal entity, it is taxed as such. Other entity types, like sole proprietorships and partnerships, are not taxed at the business level, but their owners are taxed on their profits and losses from the company. This is called pass-through taxation.
Corporations are taxed at the company level, and their shareholders are taxed on any profits that are distributed to them.
Another possible disadvantage of incorporating a business is the level of documentation and organization required. There tend to be more state requirements for annual reporting and the like when it comes to corporations, versus other business types.
How To Incorporate
If a business owner decides that they want to incorporate, they should make sure to complete these tasks:
- Decide where to incorporate (requirements for incorporation vary from state to state).
- Meet with an experienced business attorney to make sure to choose the best fit for the company.
- Decide on the management structure and board of directors.
- Choose a registered agent for the business.
- File the articles of incorporation and any other documentation requirements for the state in which the business is incorporating.
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