What Is the Meaning of Jurisdiction of Incorporation?
What is the meaning of jurisdiction of incorporation? The jurisdiction of incorporation is the state where a corporation is formed.3 min read
2. Incorporating in Other States
3. Shareholder Influence
4. Limited Shareholder Liability
5. Perpetual Existence of a Corporation
6. Acquiring Capital for Corporations
Updated October 29, 2020:
What is the meaning of jurisdiction of incorporation? The jurisdiction of incorporation is the state where a corporation is formed. The Uniform Commercial Code, or UCC, regulates business and trade in many states, and jurisdictions are used to encourage the equal application of laws in commercial endeavors that cross state borders.
Jurisdiction of Organization
Under the rule of commercial law, a business that's just starting or one that's going through the process of incorporating, must follow state laws and regulations from the jurisdiction where the company is being formed. The jurisdiction of the organization, in this case, is the state. As an example, when filing for Incorporation companies might have to provide paperwork to the Secretary of State or another state agency that provides a similar function.
Incorporating in Other States
Some people recommend incorporating in the three states that are known as being the most small-business-friendly. These states are:
These three states are known for having lower income tax rates for small business owners and in some cases no corporate income taxes. That doesn't make them the right choice for every business that wants to incorporate though. For businesses that don't have at least 5 shareholders, it's best to incorporate in the state where you reside or the state where you plan to operate the business.
When you do incorporate in another state, there are sometimes additional fees and extra paperwork to file in the home state. This is due to the fact that you're operating out of the state. For some small businesses, the extra fees and time spent filing paperwork end up costing more than the little bit saved on taxes due.
A company or corporation exists as its own legal entity. It has its own legal standing and that standing is separate from its owners. The owners are referred to as shareholders and the people who manage it are called the officers and directors of the corporation. When the Articles of Incorporation are filed that begins the existence of a corporation. The Articles of Incorporation are also called:
- The Charter
- The Certificate of Incorporation
- The Letters Patent
All corporations have directors, officers, and shareholders. A corporation's shares are owned by the shareholders. Because votes are linked to shares, shareholders are able to maintain control over the corporation. When there's only one shareholder, that person has control over the business. When a corporation has multiple shareholders, the majority shareholder gets the most voting shares and maintains control through votes.
Shareholder control isn't complete because they don't have a direct hand in managing the business. The clout shareholders have is used for influencing things like, electing new directors and removing old directors, as well as granting approval or down-voting some major corporate decisions that are up for a vote.
Limited Shareholder Liability
The limited liability the shareholders enjoy is one of the main advantages of forming a corporation. Most of the time, shareholders aren't held responsible for the corporation's debts and other legal obligations. The liability for the debt that shareholders do incur within a corporation is only the amount that they invested and not more. Creditors' claims can only be held against the business itself, and shareholders can't be forced to cover the corporation's debts.
Perpetual Existence of a Corporation
A corporation can exist in perpetuity. That means, if someone who holds a place of importance in the business passes away or retires, the business continues to exist. The corporation isn't dependent on the inclusion and presence of shareholders, directors, or officers because it exists as its own separate entity or person. The corporation's ability to exist in perpetuity provides an advantage when it's time to transfer ownership, which is done through shares. Also, with its status as an independent entity, it's able to own property, enter contracts, and it can also be sued or file suit against others.
Acquiring Capital for Corporations
Compared to other business forms, such as sole proprietorships or partnerships, corporations have more opportunities for capital acquisition. Corporations are able to issue different classes of shares. They're able to offer other forms of debt instruments, like bonds, when they need to raise capital. The variety of offerings are often appealing to investors who prefer different types of stock.
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