Incorporation
Incorporation is the process of converting
your business into a Corporation. A Corporation is a separate and distinct
legal entity with its own identity separate and apart from the owners
or shareholders of the business. As a separate legal entity, a small
business incorporation can own property, enter into contracts, and
conduct business under its own name.
Small Business Incorporation: The primary
reason many businesses form Corporations is, to protect their personal
assets. In absence of a legal setup for your business, personal liability
for debt is unlimited. In situation that your business suffers severe
financial losses or difficulties, the creditors can take away your personal
property or assets. On the other hand, a Corporation is responsible for
its own debts and other obligations. The shareholders or the directors
of the business are not responsible for corporate liabilities. Thus, if
a Corporation suffers losses, the Corporation itself should bear those
losses with its own resources. The personal assets of the individual shareholders
are not under any threat. A small
business incorporation thereby, protects the owners or shareholders
of a business, against any personal liability.
A Corporation has many tax advantages available, including setting up
pension, profit sharing, and stock option plans. As corporate income is
not subject to social security, workers compensation or medical taxes,
there is huge saving on self- employment taxes. The only salary that you
pay to yourself is subject to self-employment tax. A Corporation possesses
centralized management; ownership in a corporation is easily transferable.
A Corporation's life is not dependent upon its members. It possesses the
feature of unlimited life. It can continue to exist and do business, even
after the death of its founders. Capital can be raised more easily through
the sale of stock. Putting Inc., after your business name gives you credibility
with your with potential customers, employees, vendors, and partners,
representing professionalism, and trust. Additionally, many banks, when
providing a small business incorporation
loan, prefer the borrower to be an incorporated business. Retirement funds
and qualified retirements plans can be set up more easily with a Corporation.
A corporation can be formed in any state. Although laws
and fees governing corporations vary from state to state. Most of the
time, people choose to form their Corporation in the state in which they
are conducting business. In certain cases people also choose to form their
Corporation in states, other than where they are operating their business.
Any state that you do business requires you to file a "Foreign Qualification",
if you are not incorporated there. Also, if you form a Corporation in
one state and do business in another, your business is subjected to taxation
and annual report fees from both the state of incorporation and the qualifying
state. This is so because, many states tax a Corporation that exists in
their state, even though it is not doing business there. Another disadvantage
of incorporating outside your home state is the possibility of having
to defend a lawsuit in the qualifying state.
This decision generally depends upon the cost analyzing by comparing the
expenses of incorporating in the state of operation versus qualifying
to do business as a foreign corporation in another state. Also, since
the laws and tax structure varies from state to state, it is important
to determine the advantages and disadvantages of the same for each state.
If the Corporation does business primarily within a single state, local
incorporation is often preferable. The cost of local incorporation is
usually less than incorporating in another state as a foreign corporation.
Few state jurisdictions require publishing a notice in a local newspaper,
declaring that a small business
incorporation has been formed mentioning the corporate name.
The first step to incorporating your business is selecting
a business name of your Corporation. The name should be chosen carefully
that portrays the image you want for your new Corporation. Legally, the
name you select must not be "deceptively similar" to any existing corporation
that has been previously registered or must be "distinguishable on the
record" of your state. The Secretary of State maintains a list of existing
corporations and will not allow a new company to incorporate using an
identical or unfairly similar name. Additionally, the name you choose
should project that your business has been incorporated which requires
the corporate name to be followed by some kind of indicator, or abbreviation
like "Inc", "Co", "Incorporation", "Corporation", "Company", "Limited",
or "LTD". Incorporating a business requires
proper completion of the Articles of Incorporation, also called a Charter
or Certificate of Incorporation in some states. Articles of Incorporation
is the main filing document that begins the Corporation's existence under
the state law. Although the requirements of Articles of Incorporation
vary depending upon the state, it basically contains information about
the corporate name, the registered agent (if appointed), and the Corporation's
business address. A registered agent is a specialized business incorporation
attorney specialist residing in the state in which the business is incorporated.
He is hired to handle your initial as well as subsequent incorporation
filing and is responsible to receive notices from the state and lawsuits.
The people who are incorporating the business, as well as the registered
agent (if appointed) sign the Articles of Incorporation. Once the articles
are filed, your Corporation should hold an organizational meeting where
Corporate ByLaws are adopted. This is an internal operating document that
sets the rules for operating the corporation and can be modified as the
business grows and changes. The share certificates are distributed amongst
the shareholders. The transactions are accordingly recorded and filed
in the corporate record book. A Corporation
is owned by shareholders who influence the corporate decisions through
indirect methods such as electing and removing directors, approving or
disapproving amendments to the articles of incorporation and voting on
major corporate issues. The "board of directors" are responsible for making
the major business decisions and supervises and appoints the officers
(President, CEO, Secretary, Treasurer, etc). Officers are responsible
for the everyday management of the Corporation. A shareholder can serve
on the board of directors as well as an officer. In fact, in most states
one person alone is eligible to form a Corporation. Operating a Corporation
involves, holding regular Board meetings of the directors and shareholders.
The minutes of major company decisions and general corporate compliance
as dictated by the Corporate laws are maintained.
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