What Is the Purpose of the Incorporation Process?
What is the purpose of the incorporation process? The most common factor for incorporating a business is to have personal liability protection for the owners.3 min read
What is the purpose of the incorporation process? The most common motivating factor for incorporating a business is to have personal liability protection for the owners.
How to Incorporate Your Business
The word "corporation" originates from "corpus," which means "body" in Latin. A corporation is a legal body or a distinct entity. It can:
- Conduct business
- Enter into contracts
- Hold property
- Take legal actions in its own name.
A corporation gives the personal liability protection to its owners, which means the owners cannot be held personally accountable for corporate liabilities. A corporation exists separately from the people who created it or who conduct its operations.
You can form a corporation by filing articles of incorporation with the secretary of state. The articles or the corporate charter usually includes the following information:
- The purpose for forming the corporation
- Incorporators' names and addresses
- Authorized share capital
- Voting and other rights associated with different types of stock.
Why Incorporate: Advantages of Incorporation
Personal liability protection:
This is the most important reason for incorporating. Shareholders are not legally liable for the corporation's actions, debts, and obligations. That's because the corporation is a completely separate entity from its owners.
Unlike proprietorship businesses and partnership firms, the existence of a corporation does not depend on the life of its owners. It continues to exist until it's legally dissolved or merged into another business.
Transferring the ownership of proprietorship and partnership businesses can be quite cumbersome. You need to change the title in the property documents, prepare new deeds, and take several other administrative steps. However, in case of corporations, the ownership is held in the form of shares. You can easily transfer the ownership by transferring your shares.
Ability to raise funds:
Incorporation makes it much easier to raise capital for your business. People prefer to invest in corporations because of limited liability and easy transferability of shares.
- Corporations have a well-established body of law and legal precedent, which serves as a reliable guide to owners and managers.
- Corporations are the ideal structure for public companies.
- In some cases, corporations can be beneficial from taxation point of view. For example, you can elect for the S corporation status, which lets you pass the business income through your personal tax return.
Disadvantages of Incorporating a Business
- Setting up a corporation is more expensive than starting a partnership or a sole proprietorship business.
- Incorporation entails additional recordkeeping and administrative requirements. For instance, you need to hold board meetings and annual meetings of shareholders. You must also file periodic returns with the state agency and pay stipulated filing fees.
- Forming a corporation often subjects you to additional tax burden. C corporations are usually subject to double taxation.
The Process of Incorporation in Detail
In most of the states, the secretary of state regulates the corporate affairs. You can contact your state agency for forms, fees, and instructions on forming a corporation. You can often file for incorporation yourself without hiring the services of a business attorney. However, it may take you some time to accomplish the process successfully. You may also miss some important points in your state's law.
Incorporation expenses include the cost of getting:
- Helpful resources
- Filing fees
- State-specific costs.
If you decide to file through a lawyer, it may cost you additional $500 to $1,000. Alternatively, you may also choose to incorporate through an incorporation service company.
One of the initial steps in incorporation involves preparing articles of incorporation. In some states, you can get a printed form for this. You can complete the form by filling up requested details. On approval of your articles of incorporation, you will receive a certificate of incorporation from the secretary of state.
You will also need to prepare corporate bylaws. These are the regulations for internal governance of your company. Bylaws describe the rules and procedures for:
- Holding of meetings
- Transfer of shares
- Appointment of directors
- Other operational issues.
Place of Incorporation
You need not incorporate in the state where you operate your business. Instead, you can choose to incorporate in any of the states or the District of Columbia. However, if a corporation conducts business outside the state of incorporation, it may have to register for a certificate in the other state.
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