incorporate your business
Understanding the elements of a corporation is the first step in evaluating whether incorporation is right for your business.
What is a corporation?
In the shortest definition possible, a corporation is a legal entity, created by a state filing that exists separately from its owners. Legally speaking, a corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law. Legal speak can often be confusing, and that is one of the reasons why many entrepreneurs seek to incorporate their businesses themselves, or at least to research the incorporation process before they meet with an attorney.
A corporation is created when properly completed articles of incorporation are filed with and approved by the proper state authority. In many states, it is the secretary of state that processes and approves the articles of incorporation. Each state charges filing fees to form a corporation.
Most people are probably familiar with a different type of business structure, the general partnership. The general partnership is an extension of its owners;"> it is defined by the Uniform Partnership Act as an association of two or more persons to carry on as co-owners of a business of profit. A partnership comes into existence without the need to file any formal papers with any state agency or official.
Publicly held versus privately held corporations
There is often confusion regarding the different between publicly held and privately held corporations. Incorporating your business does not mean going public or having your corporations stock traded on a national exchange, such as the New York Stock Exchange or National Association of Securities Dealers Automated Quotation. Many people automatically assume that the term corporation means a large, publicly held company, but that is not the case. In reality, there are fewer publicly held corporations than there are privately held corporations.
In privately held corporations, often also called closely held corporations, the ownership of the company is private, meaning that the stock is not offered for sale to the general public. Private companies generally have relatively few shareholders, as compared to the thousands of shareholders that publicly traded companies have. Most entrepreneurs who incorporate their businesses have closely held corporations, often with as few as one shareholder, and keep their corporations closely held throughout the life of the business. That is not to say that your business cannot grow, go public, and become the next hot stock touted on Wall Street. After all, many successful companies grew out of entrepreneurial dreams and visions put in place in a college dorm room, a basement, or a garage.
Who are the important players in a corporation ?
Corporations have three basic groups of players: shareholders, directors, and officers. Each has a district role within the corporation; however, with small corporations these roles may blur to a certain extent.
COMPARING THE TYPES OF BUSINESS STRUCTURE
There are a number of types of business entities from which you can choose when you are deciding on the structure of your business. Because of this, the decision as to what type of entity to form often proves to be a difficult one for business owners. Some structures are very different from one another, while others have a number of identical characteristics. As you evaluate whether or not to incorporate your business, you should be aware of the other possible entities and their advantages and disadvantages. This information is intended to help you decide what type of structure is best for your particular business.
EVALUATING INCORPORATION
Advantages of incorporating your business
There are a number of advantages to forming a corporation. Limited liability, which is the primary reason most business owners decide to incorporate. This advantage and many others are discussed in more depth.
Limited liability
Since the corporate entity exists separately from its owners, the owners generally are not responsible for the debts and liabilities of the business. Many entrepreneurs make substantial financial commitments to get their business off the ground. By incorporating, business owners protect their personal assets if the business should have financial or legal troubles or if it should fail.
Shareholders liability is generally limited to the amount they have invested in the corporation. There are some situations in which a business owner may be held personally responsible for the debts and liabilities of the business. One of these is personal negligence. For example, if a dentist has incorporated his practice is sued, the dentists personal assets could be at risk to satisfy the debt and liability that his practice incurs as a result of the suit.
Another example is when the owners limited liability has been compromised through a contract. For example, banks often require a personal guarantee by the corporations owner or owners for any loans granted to new corporations. If the corporation cannot pay back the loan,. The personal guarantee binds the owners to personally pay it back.
Note that the limited liability that the corporate entity provides to shareholders does not extend to criminal liability. If you, as a shareholder, engage in a criminal or fraudulent act, you can be held responsible for that act and face criminal charges.
Tax-Deductible payments
Certain payments that corporations make that are considered reasonable and necessary to the business are typically tax-deductible. Examples include salaries, office supplies, contributions to a plan for employees, and certain insurance premiums.
Unlimited Life
A corporations life is not dependent upon the survival of its owners. If a shareholder dies, the corporation will continue to exist and could continue to do business. Conversely, because there is no separation between the business and the business owner in a sole proprietorship or partnership, the business no longer exists if a business owner dies.
Transferability of Interest
Not only does a corporation have unlimited life, but if a shareholder dies or wishes to sell his or her interest in the company, that interest can be freely sold or transferred to another shareholder. Shareholders in a corporation do not need to get the permission of other shareholders to transfer their ownership interest. In the case of a sole proprietorship, however, because there is no separation between the owner and the business, the owner cannot transfer his or her ownership without completely selling the business. With partnerships and often with limited liability companies, owners must obtain the permission of the other owner prior to selling or transferring their interest in the business. With corporations, ownership interest can be freely transferred to new or existing shareholders.
Centralized Management
Corporations have a representative form of government in which the shareholders elect a board of directors that has responsibility for all major business decisions. The board of directors then appoints officers to manage the day-to-day operations of the corporation.
Ease of Raising Capital
As long as a corporation has authorized and unissued shares outstanding, stock can be sold to raise additional capital for the corporation. Conversely, with a sole proprietorship, other than obtaining loans, the only way for the owner to raise outside capital would be to add a partner and share the responsibilities of the business with that partner. Additionally, corporations can often raise capital more easily because people are often more willing to invest in something in which their liability exposure is limited.
Increased Credibility
Many entrepreneurs, particularly independent professionals, may find entering into new relationships difficult if they operate as sole proprietorships or partnerships. Some large corporations and vendors will work only with companies that are incorporated or formed as limited liability companies.
DISADVANTAGES OF INCORPORATING YOUR BUSINESS
There are a number of positives in incorporating your business; however, there are aspects of incorporation that may be considered disadvantages. Whether an owner considers these aspects to be disadvantages often varies depending on the owners personal preference or particular business situation. Many entrepreneurs consider the primary disadvantage of corporations to be double taxation.
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