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Small Business 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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