Incorporation Overview

If you are wondering what is an incorporation, you are inquiring about the process of creating a legal structure for a business. Such legal structures could include the limited liability company (LLC), S corporation, C corporation, non-profit 501(c)(3), and cooperative. Incorporating your business into one of these structures is a multi-step process that could be highly beneficial, if the legal structure you choose is the right fit for your business.

The Incorporation Process

To have your business incorporated, the following steps must be taken:

  1. File Articles of Incorporation. This is a legal document that lists your business’s name and location, primary purpose, the number of shares it will have, and what class of stock will be issued (if any). Once drawn up, this document will be filed with the Secretary of State or other state office that handles incorporation. A filing fee will be required, varying by state.
  2. Define bylaws. These will describe in detail greater than the articles how the business will function. Important details include, but are not limited to, the responsibilities of directors, shareholders, and officers and the location and time of stockholder meetings.
  3. Other fees. Depending on where you are incorporating, there may be jurisdiction-specific fees and registration requirements that you will also have to deal with.

The incorporation process can be completed on your own through the help of books, software, and online resources, but in most cases, it is recommended that you seek the assistance of an attorney skilled in the matter of incorporation. An attorney can not only save you time, but also point out details of the law that you may have otherwise missed, which can save you money and more time in the long run. There are also companies that provide incorporation services that will prepare and file your documents for you.

The Benefits of Incorporating

There are many benefits to incorporation, and these include:

  • Personal liability protection. An incorporated business affords you protection from personal liability to your business debts and other obligations. This means you can only lose what you have invested in the company, not personal assets like your car or home. Corporations have an additional advantage insofar as they can raise more money through equity financing and do not have to repay stock investors.
  • Tax benefits. Incorporated businesses can gain certain tax benefits under certain circumstances. S corporations, for example, have pass-through taxation, which means tax responsibilities will be passed through to the individual shareholder and not paid on both the corporate and individual level, thus avoiding double taxation.
  • Corporate identity. Incorporation can often give more credibility to your business in the eyes of others. Potential investors, for example, may perceive you as being more serious about your enterprise if you have incorporated it.
  • Raising of capital. Incorporation will allow you to raise capital more easily with the sale of securities and stocks. Corporations can also be listed on stock exchanges like the New York Stock Exchange (NYSE).
  • Unlimited life. Corporations may exist in perpetuity and are not dependent on your involvement in them; unincorporated entities, on the other hand, are dependent on who owns them and are more limited in scope.   

The Drawbacks of Incorporating

That said, there may be some drawbacks to incorporating, depending on your business needs. These drawbacks may be more likely if you are a small business owner, and they may include:

  • Paperwork. Incorporating may mean an increase in the amount of paperwork you will have to deal with. For instance, depending on your business structure, you may have to file your tax returns twice: one for yourself, and one for your business.
  • Loss of control. In some situations, the founders of a company may lose control of the company by being voted out by the stockholders.
  • Increased fiscal scrutiny. Corporations have more auditing and reporting requirements imposed on them by the Securities and Exchange Commission (SEC).
  • Cost. Incorporation requires the payment of filing fees, some of which may be hard for a startup to bear. For example, in Massachusetts, there is a $520 filing fee for LLCs, plus an additional $520 annually for an LLC report. Other states may be less than this, but most will range from $50 to several hundred dollars.
  • More operational formalities. Corporations are required to hold annual meetings for the directors and shareholders; unincorporated entities are not. They also have a more rigid structure that must be adhered to.

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