Incorporation- a big step towards success:
Incorporation is all about forming of a new Corporation. Incorporation has been abbreviated as Inc. in US business names. This article mainly deals with the United States and majority of the contents of it does not correspond to the rules and regulations prevailing in other Countries and does not have a world-wide view.
The forming of the corporation may be of various types such as a business type, a non-profit organization, a new city/town or even a Government sponsored body. The Corporation is a legal body or structure.
Therefore, the corporation exists separately from its owners. The corporation is a creation under the authority of the laws of a State. The corporation may consist of a person, a group of person who become shareholders. The corporations existence is separate and thus it is distinct from its members. A corporation created immediately after procuring articles of Incorporation, which is called as a charter duly filled-in with the concerned state authority and also after paying a required fee for the purpose. In some States, the charter is known as certificate of incorporation.
Now, let us look at the initial steps before forming a corporation. The steps are not in a specific order. Firstly, the plan for starting a good business or the nature of work of the corporation has to be formulated. It should be well thought plan. As the second step, for all such type of activities, fund has to be raised. Sufficient financing is the basic requirement. There are many methods for raising funds for corporation. Corporation normally obtains money from different sources. The sources also include self-financing. Thirdly, formation of a capable, skilled and competent management team is required. Fourthly, to know the target customer or target group is another requirement. Finally, in each state, the rules and regulations are little different. In some states, the rules are very friendly. Corporation has to be formed as per the rules of the concerned state.
Now, let us discuss about the advantages and disadvantages of incorporation. Firstly; here are the advantages of incorporation.
The limited liability factor is the key reasons for forming a corporation. It is nothing but a protection to the owners. The corporation is considered as a legal entity. Therefore, the concerned shareholders have limited liability for the corporations debts. In view of the above, the personal assets of shareholders are safe in case of any corporation debts or liabilities.
The Tax factor: As because Corporation is a separate legal entity, therefore, it pays tax separately as per the corporation rate. Owners have to pay only the tax on corporate profits which are paid to them as salary, bonus, dividend, etc.
It attracts investors: The build-in stock structure of a corporation makes it attractive to all the investors.
The operational structure: Each corporation has a management structure. Shareholders are called as owners and they form a Board of Directors, which subsequently elect the other officers. The Board of directors is responsible for operation of the corporation. The Board normally has a CEO, vice-president, treasurer and a secretary. This structure smoothens the functioning of a corporation.
Uninterrupted existence: A corporation continues to be exist until shareholders decides to dissolve it or merge it with other business. Even after departure of shareholders, the corporation exists.
Transferable shares: Shares can be transferred freely. Even incase of death of shareholders, corporation continues to run through nominees or transferred shares.
Owner/employee: The business owners are also working as an employee and thus become eligible for reimbursement of many expenses, including insurance, etc.
Raising funds: The Corporation can raise fund through the sale of stock.
Credit rating: The Corporation acquires own credit rating. Thereby, build a separate credit history.
There are some disadvantages too:
Fees: The related fee is on a higher side. There are typically four different types of fees. A fee to file the article of incorporation to the secretary of the state, a first year franchise tax prepayment, fees for various government fillings and attorney fee. The fee structure may be a big factor at the time of incorporation.
Formalities: In case a corporation does not follow the formalities, then it may not receive the benefits of a corporation. A huge lot of paperwork has to be done. Report and tax return relates with huge paper work.
Dissolution: The dissolution of the corporation does not happen automatically. A corporation can be dissolved either by voluntarily or involuntarily. The officers and directors of corporation are charged with responsibility for dissolving the corporation.
Tax factor: Some corporations do have the double-tax consequences. The first tax has to be paid when the company starts making its profit. Second time, at the time of issuing dividends, tax can be charged.
Disclosure of names: In many States, the shareholders have to disclose personal matters like names, addresses on various documents.
For the entire Incorporation process, the
filing of Articles of Incorporation is the first step. It is also called
as Charter or letters Patent. The corporation name should be available
at the concerned registering authority. No two names can be similar. To
select a name of the corporation, normally it is a make up of 3 parts:
distinctive element, descriptive element and the legal ending. For example,
a corporation is named as Rainbow Computer Inc. Here, rainbow is the distinctive
element, the word Computer is the descriptive element and the legal ending
is Inc. With regard to business license for corporation, a FBN statement
(Fictitious business name statement) has to file at the time of incorporation.
This is required for getting a license.
The reason behind filing FBN statement is two. Firstly, to prevent customer confusion in case there are two corporations with the same name. Secondly, the customer gets the opportunity to find the real owner. FBN is also known as dba, which stands for doing business as. But remember, a corporation is not required to register a FBN unless it operates under a name which is different from its name on file submitted to the Secretary of the State. Normally, after submitting of filing within 30 days, the FBN statement must be published in an approved newspaper. Then after successful formalities, a business license will be offered, which is a local tax registration certificate. Local license tax levied upon varieties of criteria. Moreover, the corporation must comply with the zoning laws apply in the particular state. The city planning department is usually in charge of such permits and regulations. Moreover, to conduct some businesses like, providing investment or counseling advice, manufacturing alcohol, tobacco, selling firearms, etc, a state or federal license and permit is required. That depends on the nature of business of the corporation.
us look at the required fee factor. At the time of filing, the required
fee has to be paid. Normally, Secretary of State charges fee ranging from
$100- $250. Other Government filing fee will be around $50-$200. Moreover
an amount varies from $800 to $1000 has to be paid under first-year franchise
In addition to it, the attorney fee is also there. Attorney fee can vary from $ 500 to $10000 depending upon size of the Corporation, number of shareholders, etc. Some online Companies help in incorporating where one can skip an attorney.
The legal entity and the acceptance of the corporation is very much there as soon as it is Incorporation. After a Corporation has been formed, it has also an international perspective. The legal concept of the corporation is recognized by other Countries. The legal ending may be different in different places. For example, in US, it is incorporated, in short Inc. In UK it is known as Limited, in short known as Ltd. Italy uses Srl, The Netharlands uses NV, etc.
Last but not the least; let us look at the following aspect. There are
certain situations, where a corporation can be more beneficial in some
States of US. A corporation can get more benefits in a separate state
other than its home state. Thus, a corporation is allowed to be incorporated
in a separate state.
In this regard the names of two states namely Delaware and Nevada are most popular. Nevada does not charge a state corporate Income tax. It allows higher level of privacy both to the corporation and personal information of owners. Thus, Nevada is a hot spot for Corporation to run their business. Delaware has been considered as the heaven for corporations. A Delaware corporation is a corporation chartered in the US state of Delaware. Around half of the US publicly-traded corporations, more than 50% of the fortune 500 companies of US, are incorporated in Delaware. The courts and laws of Delaware are extremely friendly to the Corporations. There is a business friendly government exists in Delaware. Documentation process is very easy and the response is very quick in Delaware.
So this is in nutshell about the Incorporation process. Corporations are subject to the laws of the State where the Corporation is active or laws of any other State where the Corporation is doing business. It has a world-wide acceptance also. All states in US have their own Corporation statute that set fourth their own rules and regulations by which a corporation can be formed and maintained thereafter. Looking at the advantages, the owners, i.e., shareholders of a corporation can lead a hassle free life. Like a legal person, the corporation also gets the status of a person. Thereby, a corporation can sue or can be sued. The corporation is liable for own debts and obligations. Therefore, the shareholders enjoy limited rights and legally shielded from corporations liabilities and debts.