The Basics Of Business Incorporation
Choosing to incorporate your business can be a difficult decision. It can be the best choice for some people, but it could be ineffective for others. For you to make an educated decision on whether or not incorporating your business is right for you, there are things that you need to consider and factors that will help you decide one way or another.
In this post, we will go over the basics of business incorporation so that you can make an informed decision on how (or if) it’s right for you and your company.
What is a Corporation?
A corporation is a legal organization. It is created by filing Articles of Incorporation with the Secretary of State and paying a fee for the filing. You will then be issued corporate filing papers, which are what you need to establish your corporation.
A corporation is created and authorized by state law, which means the laws governing it vary from state to state. However, many states have similar rules governing their corporations in terms of their structure (i.e., size and ownership), taxation, and other matters related to owning and operating one.
A corporation is not an individual. It is a legal entity that is separate from the people who own and operate it. The directors and officers of the corporation are responsible for its actions; they are the people that get sued if something goes wrong.
The corporation itself has certain “rights” such as limited liability, which means that when something goes wrong, the owners of the business can be held liable, but no one else involved in their operations.
The owners of a corporation are known as stockholders and they take on different levels of risk by investing in a corporation. The risks associated with investing in a corporation fall into the categories of fronting (investing your own money), bonding (covering your own risk), and other types of risk.
The key difference between a partnership and a corporation is the fact that while both face liability for its actions, there are important differences in how these entities are structured. A partnership is not obligated to distribute profits when making them, but a corporation, on the other hand, is obligated to distribute these profits to its owners.
In addition to this, partnerships are not bound by state law where as corporations must abide by federal laws.
Structuring Your Corporation
When you decide to incorporate your business, there are a few things that you need to address. It is important that you weigh the costs and benefits of each decision when making your choice. The following are some of the things that you will be responsible for when choosing how best to structure your corporation:
Limited Liability - When someone chooses to incorporate their business, they do so in order to face limited liability for the actions of their business. This means if something goes wrong with the corporation, it is its owners who get sued and no one else involved in its operations can be held liable for any wrongdoing.
Advantage - There are other advantages to incorporating your business that you should consider before deciding whether or not it’s the best choice for you. The benefits of incorporation include the social benefits of being a member of a group, as well as tax savings.
Common Benefits of Incorporation
Most states have tried to standardize incorporation into their state laws, so there are certain benefits that a corporation is required by law to provide to its members. These common benefits include:
Limited Liability - This means that if something goes wrong with the business, the owners can only be held responsible to the extent that they have invested their own money in it.
Tax Benefits - Corporations are required to pay income taxes on their profits, which are known as “properly distributable net income” (PDNI). However, a corporation can choose to apply for S-corporation status in order to save on taxes.
Social Benefits - When you incorporate your business, your company becomes part of a larger group of individuals and groups who share a common goal. This can be an important benefit since it is a great way for you to network with other business owners in your industry. Some cities even have special sections devoted to this purpose within their business communities.
Choosing the Right Incorporation
There are a few questions to ask yourself when deciding what type of business structure is the best choice for you and your company. The following are some questions that you should ask yourself when deciding which type of incorporation is best for your needs:
What are my goals? - Are you solely interested in the tax benefits? Or do you want full liability protection so that if something goes wrong, your business can face only the responsibility that it has invested its own money in its corporation? If it is only for tax benefits, S-corporation status is a good choice. If you want full liability protection, C-corporation status is usually a better choice.
What type of company do I want? - Do you want to have a limited number of investors or do you want to allow many people to invest in your business. By choosing C-corporation status, you can bring in as many investors as you need. However, with S-corporation status you cannot have more than 35 shareholders.
How much cash do I need up front? - Most states require that the incorporator (i.e., the creator of the corporation) have at least $25 worth of investment in his or her corporation before it becomes a legal entity, let alone begin doing business.
Divisions of your Corporation
So you have decided to form a corporation. What does that mean for you? The following are different segments of your corporation:
Shareholders - These are individuals who own part or all of the business and receive shares of stock in exchange for putting their own money into it. They do not get paid as stockholders, they only get paid if they work at the company. If you have a lot of investors, it’s important that you set up an incentive program so they feel like they are getting a fair deal and not wasting their time on something that won’t make them any profit.
Directors - These are the people who run the organization.
Conclusion
If you are just starting out, the best bet is to start as a sole proprietor. Once your business begins to grow, you can then decide if it is time to incorporate. Incorporation allows you to limit your liability and enjoy the benefits of being part of a larger community. You can apply for S-corporation status in order to benefit from tax savings, however, if this isn’t a concern for you and your company, C-corporation status should be what you choose. Whatever decision you make when incorporating your business, it’s important that you weigh the pros and cons before making a final decision.