What Does Incorporating a Business Mean?
Incorporating a business means that someone is creating a limited liability company (LLC), incorporation (INC), or a corporation (CORP) business entity. These business formations limit the personal liability of founders, members, owners, and shareholders over the company’s financial and legal obligations.
Incorporation Explained
An incorporated business has legal rights. It can make decisions, take in profits, pay debts, own assets, and issue shares. Entrepreneurs set them up to have a legal vehicle by which they can generate profits without exposing their personal assets and finances to the venture.
Reasons for Incorporating a Business
The most compelling reason for incorporating a business is personal asset protection. For example, suppose your company unintentionally commits a founder’s agreement breach or acts of negligence. In that case, you want to shield your assets via limited liability. Incorporating a business can also include forming a corporation, which authorizes your company to raise capital through IPO, common, and preferred stocks.
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How to Incorporate a Business
You incorporate a business by following the applicable rules and regulations of local, state, and federal governments. While every department follows a slightly different process, general methodologies are still the same. Steps to take when incorporating include drafting corporate bylaws, filing Articles of Organization or Incorporation, and forming your executive team.
Here is a closer look at seven steps to take when incorporating a business:
Step 1. Verify our Business Name’s Availability
When incorporating a business, one of the first tasks is to create a business name and to ensure that it is available for use. If you’re launching a new business, you’ll need to select a unique business name. Your business name should be memorable and convey information about the nature of your enterprise.
If you are already a business owner with a name, you can verify that it is available for use in your area to avoid trademark infringement. First, consult with your secretary of state’s office to determine the availability of a given name. Additionally, you can check with state and federal trademark registrars to ensure that your business name is not already registered with another company.
Step 2. Select a Headquarters Location
After confirming that your business name is available, you’ll need to choose the location of your company’s headquarters. The most straightforward decision would be to select the state in which you reside and conduct the majority of your business.
However, your headquarters can technically be located anywhere, meaning you can incorporate in other states. The most popular state you can incorporate in is Delaware due to its priority and favorable treatment of corporations.
Step 3. Choose the Type of Legal Entity You Want to Form
Now is the time to decide on the type of business you wish to establish. Companies with limited liability are classified into C corporations (C corps), S corporations (S corps), and LLCs. Although LLCs are not technically corporations, they are similar in nature.
We’ve described the three types of limited liability incorporations below:
- Type 1. C corp : C corps account for the lion’s share of large corporations. They are legal entities distinct from their shareholders. C corporations may open bank accounts, engage in legal proceedings, establish credit, and acquire property.
- Type 2. S corp : S corps are similar to C corps except for shareholder count and taxation. They are limited to 100 shareholders. They provide pass-through taxation, which means shareholders will be taxed only once on their personal tax returns instead of twice.
- Type 3. LLC : Single-member LLCs and multi-member LLCs allow for pass-through taxation. They also provide member-owners with personal liability protection, which safeguards their personal assets in the event of financial hardship or legal action by third parties.
Step 4. Elect or Appoint Your Directors
Each corporation is required to elect a board of directors. The board of directors is responsible for managing the corporation and making strategic decisions. Therefore, your board of directors should possess industry expertise, exceptional leadership and management abilities, and a commitment to acting in the business’s best interests.
Step 5. Appoint Your Registered Agent
A registered agent can receive and forward mail on behalf of your corporation. You must have a registered agent to receive official state mail communications. Directors and owners may appoint a third party not affiliated with your business as your registered agent as well.
Additionally, you can designate the business’s owner, an officer, or another employee to act as your registered agent. However, the person you select generally must be a resident of the state you incorporate.
Step 6. File Your Articles of Incorporation or Organization
Articles of incorporation are legal documents submitted to your state when incorporating a business. It contains information about your business’s name, purpose, location, and board of directors. A blank document for your articles of incorporation can be obtained from your state’s corporate filing office or online through your state’s government website.
You may write the articles of incorporation yourself or retain the services of corporate lawyers. Once your articles of incorporation are completed, you must file them with your state and pay a filing fee, typically between $100 and $150. Always keep a copy of your articles of incorporation on hand for legal purposes.
Step 7. Get an EIN and Open a Corporate Bank Account
You should also retain a copy of your Certificate of Incorporation to obtain an Employer Identification Number (EIN) or open a bank account.
This web page also describes incorporating a business.
Three Advantages of Incorporating a Business
There are several benefits associated with the limited liability that incorporation brings. Below, we’ve described three advantages of incorporating a business:
- Limited Liability. Incorporations provide their owners with limited liability protection. Typically, owners are not personally liable for the business’s debts and liabilities.
- Tax Advantages. Incorporation offers many tax advantages. Advantages include the deductibility of health insurance premiums and other expenses. It’s also advantageous for self-employment tax savings.
- Raising Capital. Capital can be raised more quickly by selling stock. In addition, many banks require an incorporated business to qualify for a small business loan, which is challenging. Stocks can help.
Three Disadvantages of Incorporating a Business
However, this structure type doesn’t work for every entrepreneur. Here are three disadvantages of incorporating a business:
- Double Taxation. The incorporation may be required to pay taxes on its income, followed by taxes on any dividends received, resulting in double taxation.
- Tax Filings. Various incorporation taxes can result in massive paperwork. The S corp and LLC are exceptions to this general rule.
- Management. When a corporation has many investors with no clear majority interest, management can operate the business with little or no oversight from the owners. This may not reflect shareholder interest.
Incorporated Business Examples
Let’s say you want to start an incorporated business of your own. First, you need to pull together your executive team, write corporate bylaws, and issue shares to raise capital. It is also wise to draft a founders’ agreement to be on the same page from the beginning.
However, this is too much legal risk to manage alone. Instead, shift the burden away from your team by working with corporate lawyers to help you navigate the law as it applies to your situation.
Post a project in ContractsCounsel’s marketplace to get flat fee bids from lawyers for your legal project. All lawyers are vetted by our team and peer-reviewed by our customers for you to explore before hiring.
