What Does Incorporation Mean?
Incorporation is the proper way to turn an idea into a business. A corporation is the new formal entity that keeps the company’s assets and income separate from its owners and investors.
Corporations can be made in almost every country in the world. Their names generally include words like “Inc.” or “Limited (Ltd.)” to show that they are businesses. Legally separating a business from its owners is what this process is all about.
How to Understand Incorporation
“Incorporation” is a broad term for a business filing with a state to become its legal body. Those people usually own that business (even if it’s a one-person company), and a board of directors may also be in charge.
To run a business, a company doesn’t have to be established. People who own businesses can run them as a sole proprietorship or a partnership. These legal business structures handle company debt and taxes differently than an organized entity.
Another main difference between legal businesses is the ability to issue stock. This is one of the main reasons a company might want to incorporate. When a business is incorporated, it gives people the chance to own a piece of the business by selling shares of stock. In a sole proprietorship or partnership, the only people who own the business are usually the ones who run it. But when a business incorporates, they can sell a piece of their business’s ownership.
A company can also become a corporation instead of a limited liability company. When a business files for either type, the rules rely on the state where the business is located. Each type of incorporated entity has its form.
How corporations are made and organized
The incorporation process includes writing “articles of incorporation,” which describe the primary goal of the business, where it will be located, how many shares there are, and what kind of stock will be issued, if any. For example, a closed company would not give out stock. People who own shares in a company own it. A single shareholder can own a small business, but several thousand can own huge companies often traded on the stock market.
People who own shares usually only have to pay for their shares. As company owners, shareholders can get their gains, usually as dividends. The owners also choose who runs the business.
The owners run the day-to-day operations of the business. They have a job to care for the company and do what’s best for it. Usually, they are chosen once a year. A small business may only have one director, but a big business usually has a board with twelve or more directors. Aside from fraud or specific tax laws, the owners are not personally responsible for the company’s debts.
The U.S. Census Bureau says that about 50,000 businesses apply monthly for business licenses. In November 2022, just over 47,000 business forms were sent in.1
How to Change the Name of Your Business
Many steps need to be taken to incorporate a business, and each one is different in its importance. To organize, the owner of a business must make the following choices and take the following steps.
Choose where to do business and follow the laws there.
A business should make sure it is following local zoning and business licensing rules before it becomes an official corporation. Having the correct permissions or licenses to run a business is part of this, though not all businesses may need these.
By extension, this could affect where you do business and where you choose to incorporate in the end. When running a business, it may be best to incorporate in the same state as the business. Filing in a different state may require different types of forms and different filing requirements. For instance, if you want to start a business in a different state, you might need to file a foreign company. Filing in a different state, on the other hand, might lower the fees and reporting needed to set up and run the company.
Many businesses choose to organize in Delaware because it doesn’t tax businesses that don’t do business in the state.
Choosing How to Set Up Your Business
Setting up the business structure is one of the most basic and essential choices. A sole proprietorship, a partnership, a corporation, or a S corporation are the most popular types of businesses. An LLC is another popular way to set up a business allowed by state law.
When starting a business, the owner should pick the format that will work best for them in the long run. As was already said, established businesses can sell stock, which makes it easy for owners to sell a piece of the business for personal gain. Based on the business structure, there are also critical tax and liability issues.
If you’re unsure what to do, you should usually talk to a business lawyer about your choices for setting up your business. More specific benefits and advantages of establishing a business are discussed below.
Pick a Unique Name
If you want to organize, your business name can’t be the same as that of another company in your area. It would help if you also created a unique name to protect your trademark and prevent confusion with other brands. When coming up with that one-of-a-kind name, remember that the ending of incorporated companies often ends in an abbreviation for “incorporation,” such as “Inc.”
Some websites let you look through current business names. People can type in names they want to check to see if they are available in these listings. If a business owner is going through the process of incorporating in some states, they may let them hold an available name for up to 120 days.
Choose the Registered Agent.
This person is called a registered agent, and they can receive mail and paperwork on behalf of the business. States will need a local registered agent for each company because they need a way to contact someone who can handle official business as it comes up.
The owner of the business does not have to be the listed agent. One example of a registered agent is a business lawyer for a company, as long as they have an office in the state where the company is forming. If the listed agent moves out of the state where the business is based, the company must find a new agent. On the other hand, you can pay an online law service to be your registered agent.
Write up the Articles of Incorporation and file them.
As we’ve already discussed, the articles of incorporation list many essential facts about a business, such as its name, location, information on public or private shares, the name of the incorporator, and the information of the listed agent. The articles of organization must be filed in a certain way in each state. There is a fee to file the article of incorporation with the state. Usually, this fee is a few hundred dollars.
Write up the company’s rules.
Companies must write both the articles of incorporation and the bylaws. The bylaws explain things like how to be paid, how to issue shares, what vote rights you have, and how the board of directors works.
There are more specific rules about how to run a business in the company bylaws. A business will often look at its rules to get a better idea of the best thing to do as it runs. Different states might not need a copy of these, but other groups might (for example, banks might need rules when you open an account). In addition, rules can be changed to fit how a business changes.
Run meetings of the board.
Board members will be given an essential set of tasks to do at their first meeting. At the first meeting, the board members should officially vote to approve the rules and articles of incorporation, give out shares of stock, choose officers, and make other decisions about how the business will run. Also, taking notes at meetings is important because some people or groups may need a copy of the notes at some point.
Complete Any Other Requirements
The owner should also do other operational chores as soon as a business is incorporated. Companies should get an EIN, open a bank account, file federal taxes, let people know they’ve formed a corporation (if applicable), and file yearly reports as needed. These tasks are separate from the actual process of incorporation.
Technically, the whole organization process process could be done in one day, but most of the time, it takes about two months or six weeks.
Pros and cons of becoming an Incorporation
Pros of Forming an Incorporation
When a business incorporates, it forms a protective bubble of limited liability around its shareholders and directors. This bubble is often called a “corporate veil.” So, incorporated companies can take the risks that allow them to grow without putting the shareholders, owners, and directors at risk of losing more money than they put into the business.
Established businesses can sell and give away shares, making it easy to change ownership to someone else. A sole proprietorship must sell the whole business to make money from selling company equity. However, business owners can keep central ownership but sell some of their shares to make money. Also, places for trading shares on public exchanges are much more liquid than other ways to sell a business.
If a business is incorporated, its tax rate may be cheaper than the income from a person. Incorporated businesses often have less strict tax rules on loss carryforwards and may get better tax treatment for benefits they can claim.
Cons of Forming an Incorporation
One problem with incorporation is that it requires businesses to follow specific rules to keep their incorporated status. Companies must follow their bylaws and make sure they meet all their ongoing obligations, such as filing, reporting, and other rules. One could say that since an incorporated entity’s tax filing differs from an individual’s, filing multiple tax returns adds to the administrative work.
A business that is established often has to pay taxes more than once. Take a look at an example of a company that is being charged net income tax. Then, with the money that was left over after taxes, it gives a shareholder a taxable payment. This shareholder’s income is now subject to taxation from funds already taxed.
Due to the filing, reporting, and management fees, running an incorporated business may cost more. Companies often have to get their financial records audited as part of public reporting rules. They must also pay ongoing fees and regulatory charges to keep their standing on an exchange.
Last, an established business business might be seen as less adaptable than other types of businesses in some ways. A business must follow its rules and articles of incorporation once it has been formed. It also generally has a whole board of people overseeing operations these days. When a business is incorporated, it may be more challenging for the leaders to make significant changes to the business plan or how things are run.
The pros and cons of Incorporation
Pros
- Owners are not personally responsible for the company’s debts, so they are not held responsible.
- It might be easier to get money because shares are easy to sell.
- It might be easier for owners to make money if they sell a piece of the business instead of selling the whole thing.
- May get some tax breaks compared to other types of business setups
Cons
- It often takes more time to meet the filing, reporting, and regulations standards.
- Some funds could be taxed twice if the company and shareholders are taxed on the same funds.
- It could cost more because of fees and legal costs for this type of business setup
- This structure is usually less flexible than others because the company has to follow its rules and board.
Should you choose an LLC or a corporation?
The main difference between an LLC and a company is that a smaller group usually owns an LLC than a corporation. Each company has limited liability for its owners, but it may be cheaper to start an LLC.
When is the best time to start a company?
Changing a legal entity’s position as of January 1 has many administrative benefits. From a tax point of view, this is the most straightforward change to make. When a business is ready to raise more money, it may make more sense to turn it into a corporation. This will make it easier for investors to put money into the business.
Do I have to pay myself after I become a business?
You must consider your taxes if you give yourself a wage or salary as a business owner instead of taking a draw or equity distribution.
So, You don’t have to do either of those things when you incorporate. You may need to think more about what you can pay yourself and when you can pay yourself if you choose to incorporate as a multi-member LLC.
Can a person be a corporation?
This type of business is also known as a single-member LLC. A person can choose to be treated as an S-corporation by filing Form 2553 and choosing at the right time of the year, not at the start of the tax year. You could also look into a one-person company (OPC), where the single stockholder is either a person, a trust, or an estate.
Conclusion
- The proper way for a business to be set up and start running is through incorporation.
- The articles of incorporation are documents that list the business owners. This is part of the incorporation process.
- This is called “limited liability,” and it means that the assets and cash flows of the business are kept separate from those of the owners and investors.
- A company’s tax obligations differ from those of a sole proprietorship or partnership, even after being incorporated.
- It is easier for a business to sell shares, get more money, and give up ownership of some parts of the business after it becomes incorporated.
