How to Incorporate and Why
How to incorporate a business, and should I
incorporate, are two frequently asked questions when starting a
business. Incorporation is the formal mechanics of corporation.
It is the process of filing and completing forms of
incorporation with the State’s business regulatory body and
paying the appropriate filing fees.
Here are the fundamental tasks in incorporating which is
divided into two processes, the actual process of incorporation
and the post incorporation process:
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1) Actual process of incorporation
Start by choosing a corporate name. Three parts generally
make up a corporate name; Distinctive Element, Descriptive
Element, and a Legal Ending. “American Paper Inc.” is a classic
example of a corporate name that has all the three parts. The
word “American” is the distinctive element; “Paper”, the
descriptive element; and, “Inc.” the legal ending.
Name Verification. Verify with the State you are
incorporating on the availability of the corporate name as
other entities might have already used the same as their
corporate name. There are also other considerations when
deciding on a corporate name. A chosen corporate name must not
be an effort to benefit from the identity or reputation of
other business entities.
After settling on a corporate name, file the “Articles of
Incorporation” or Charter with the appropriate State’s business
regulatory body and pay the appropriate State filing fees.
2) Post Incorporation Process
Formulate your corporation’s By-Laws. The By-Laws will
outline the operational procedures of your corporation. For
limited partnerships (LTD) or limited liability companies
(LLC), an operating or partnership agreements should be
formulated.
Appoint a set of Directors for your corporation. Usually, a
president, vice-president, corporate secretary and treasurer
are appointed. The duties and responsibilities of these set of
officers are expressed in the corporate by-laws.
Start and maintain corporate records.
Issue stocks or shareholders certificates.
Approve and adopt a corporate seal
The “how” in incorporating is rather
simple.
Corporate existence commences upon filing the appropriate
State filing fees. The “why” offers some challenges. Basically,
a corporation has some advantages over sole proprietorship. In
the over-all scheme of things, the marks of these advantages
will become evident and can be felt and appreciated.
One major advantage of a corporate business over a sole
proprietorship is the limited business liability protection
including personal debts liability given to corporations. In
the event a case of a lawsuit or a judgment is rendered against
your business, being a corporate business will shield you from
seizure of your personal assets like your home, car or bank
accounts. The coverage of the seizure to repay debts will be
limited to the assets of the corporation. On the other hand, a
sole proprietorship, when encountering credit problems gets his
personal assets to be seized. A sole proprietorship is open to
risk as far as credit problems are concerned. Forming a
corporation will help add a level of protection against these
risks.
Another significant advantage of forming a corporation is
the various tax options that may be available to corporate
businesses. Concretely, medical and childcare costs may receive
tax deductions for corporate businesses which may not be
available for sole proprietorships. A corporate business can
lower its taxable income by putting up benefit programs for
their employees and other schemes which may be considered as
business expense and are therefore tax deductibles. To all
intents and purposes, single ownership does not enjoy tax
privileges as much as corporations do.
A corporate business with “Inc. or “Corp” as its legal
ending gives an impression of competence and professionalism as
far as customers are concerned. This is also an area where a
corporation edges out business with single ownership.
No small business is too small that you won’t need it to
incorporate. When the how to incorporate comes
into mind, the why simply follows.
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