Entrepreneurs need to know that incorporation is the legal process used to form a company or corporate entity.
It’s the process involved in legally declaring a corporate entity or company separate from its investors or owners as individuals.
It’s a legal entity that separates the firms’ income or assets from investors.
Corporations can be created in most parts of the world. And are usually recognized as limited and have Inc. or Ltd. in their names.
The incorporation process involves enumerating or establishing the firm’s shareholders.
It also involves writing legal documents identified as the articles of incorporation.
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Features of Incorporation That Entrepreneurs Need to Know
Incorporation is managed by a board of directors who ensure that the company is governed and handled efficiently.
The company’s articles outline that the board of directors is entitled to control, manage and exercise their powers in a general meeting.
Directors are company representatives that are entrusted with managing internal affairs and handling the company assets.
The directors or management are often the risk-takers, while the shareholders are risk bearers.
Some of the other specific duties of the board of directors include:
- Declaring dividends
- Authorizing contracts
- Granting authorization to borrow funds
- Establishing executive salaries
The shareholders, on the other hand, have certain rights, including the right to:
- Share in dividends when declared
- Dispose of their shares
- Participate in the management and governance indirectly by voting at the shareholders’ meeting
- Buy additional shares
Incorporating a company is a creation of law and is called an artificial person.
This implies that incorporation has an entity identified by law distinct from the natural persons forming the entity.
Incorporation is formed to enable a group of individuals to perform some activities more conveniently than would be possible when they retain their identity.
Despite the company being an intangible and invisible legal person, it has certain rights similar to those enjoyed by a natural person.
It has the absolute right to own property, sue, and enter contracts.
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Benefits Of Incorporating A Business That Every Entrepreneur Should Know
Protects your brand
One of the benefits of incorporating your business is protecting your business brand and how your company operates.
It helps protect the products and services you offer to the market.
Incorporating your business helps protect the business’s overall image from being used without your consent or in undesirable ways.
Incorporation also allows you to protect your trademark, which includes your designs, phrases, symbols, or words.
These elements may distinguish your business from others.
It also helps to protect your brand recognition, including your visual cues like slogans, colors, and logos that represent your brand.
Protects your assets from lawsuits
Incorporating your business helps to ensure that you and your family are financially safe and secure.
When you resolve to incorporate your business, your personal assets may not be at risk. That’s when someone decides to file a lawsuit against your business.
This means that if a customer slips or trips in your business and takes you to court for a case, you might not be personally liable.
Incorporating your business builds a solid barrier between your personal assets or property and legal claims against your business.
If your business is sued, your family or personal possessions would generally not be at any risk.
Easier to raise capital
Incorporating your business makes it generally easier to raise capital or apply for a loan.
Incorporating a business will also enable you to open up a business bank account and begin building a line of credit.
This will enable you to focus on raising funds for growing and operating your business.
Raising capital will enable you to provide more quality products and services to your clients.
This will eventually enhance your business reputation and the number of positive reviews you acquire from your clients in the community.
Incorporating will help you build trust and establish your legitimacy with potential clients and customers.
This will help develop a credible image, credibility, and reputation for your business.
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Safeguards your assets from creditors
Another benefit of incorporating your business is protecting your personal capital or reserves from business debts, and vice versa.
When your business goes through harsh financial situations, your personal property or capital will be off-limits to collection agencies.
For instance, you cannot lose your house if you have failed to pay for your business loan.
If you have not yet taken the steps to incorporate your business, your personal assets and property are automatically linked to your business.
This includes your home, car, investment accounts, and the property you obtain in the future.
Additionally, if you file bankruptcy within your business, your personal reserves or assets can repay your debt.
Incorporation helps to safeguard your business from all these risks and scenarios.
While if you are personally sued or go through a divorce, some of your business assets and income may be protected.
Entrepreneurs should know that incorporation helps one obtain tax benefits and numerous tax deductions available to incorporated businesses.
Say, you change your business from being a sole proprietor to a business structure like a limited liability company.
In that case, there are plenty of deductions at your disposal that are not available for individuals.
Some of the tax benefits include:
- The ability to deduct operational and startup expenses
- The ability to spread out the losses over a more extensive period
- The ability to take away employee benefits
Your state or local tax authorities may provide incentives to you more quickly if you are a corporation.
However, remember that tax laws are sometimes complex. And it’s best to seek expert help from a certified accountant before claiming any deductions.
Another benefit that entrepreneurs can get from incorporation is protecting their business forever.
Your business will still be in its perpetual existence while remaining profitable and operational.
Irrespective of what happens to those involved in conducting business operations.
Perpetual existence is vital since:
- The company can continue running or remain operational without reestablishing itself multiple times.
- It offers you the ability to build a long term plan for the growth and development within the business.
Perpetual existence is vital since it’s a necessary tool for any business entity to establish a firm and secure foundation.
This foundation can form the basis from which it can expand and flourish.
Easier to transfer your business
If you want to retire from being an active business member, then incorporation makes it convenient and easy.
You can easily transfer your business compared to a sole proprietorship business structure.
Unlike partnerships and proprietorships, the life of a corporation is not dependent on the life of a particular individual.
The corporation can continue indefinitely until it accomplishes its goals, objectives, goes bankrupt, or merges together with another business.
Requirements That Every Entrepreneur Should Know About Incorporating Their Business
Select a business name
One of the initial requirements that an entrepreneur should know about incorporating their business is doing a name search and picking a business name.
The main legal requirement is to do a name search and not choose a name that has already been taken.
Your state may offer a corporation search service that will enable you to look into the availability of a name that you may want.
In this era of advancement in technology, you can choose to use online search engine technology.
This application will enable you to check whether the domain name is available for you to choose.
Decide on a corporate entity
The forms of corporate entities you can make your pick from include:
Limited Liability Companies (LLCs)
Many small businesses are initially formed as limited liability companies. An LLC is a hybrid between a corporation and a partnership.
The LLC is managed and controlled by its members, who each share a percentage of ownership in the company, totaling to 100%.
An LLC is formed when you file the articles of organization with your state government.
These forms identify the managers and the registered agents of the company.
The operating agreement in the LLC should cover the information about the responsibilities and relationships among the members.
The contractual agreement should also cover the structure of the managers and members and capital invested by each member.
In addition to information like dispute resolution planning and percentages of ownership.
There are two distinct categories of a corporation: the S corporation and the C Corporation.
C corporations are often large publicly listed companies.
A C corporation is controlled by its shareholders and managed by its board of directors. C companies are susceptible to double taxation.
S corporations are usually intended for smaller organizations.
S companies have the option of being taxed on a regular basis or having their firm classified as a pass-through entity.
When a company is classified as a pass-through entity, the owners of the company pay the company’s taxes on their personal tax returns.
The owner or owners of this type of company are also responsible for the day-to-day running and management of the business.
Prepare the articles of incorporation
Incorporation is the legal process in which a corporate entity or company is given recognition by law.
The members will have to prepare, file, and submit the following documents to the secretary of the state in order to secure the incorporation.
These documents may include:
- Memorandum of association
- Articles of incorporation
- Written consents by members who have decided to perform duties as directors of the company
- A statutory declaration by a lawyer or secretary of proposed company to the effect that all the requirements regarding the incorporation have been followed
- Notification to the registered agent of the business
The articles of incorporation also contain vital information about your company.
That may include the business purpose, company name, number of authorized shares, registered agent, preferred stock, incorporator, officers, directors, and value per share.
Submit documents for filing
As mentioned above, to fully incorporate your business, you will need to file the documents with the authorities.
In most states, the secretary of the state is responsible for corporate filings.
Entrepreneurs need to note that every state or country has its own rules when submitting documents.
Therefore, it’s vital to ensure that the incorporator is more than familiar with state or government requirements, rules and regulations prior to filing the documents.
Getting your corporate entity or corporation approved can take as little as a day online if everything is done correctly. And depending on the state you reside.
Your attorney is capable of expediting or speeding up the process if necessary.
Receive the certified documents
Once the state government has processed and approved your documents, they will dispatch them back to the address you provided on the application.
This means that you have successfully registered your business as a corporation.
If your application is not approved, you may not hear anything back.
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Select a board of directors
Once you are incorporated, it’s time to choose and elect a board of directors who will perform some of the critical duties of the company.
You will also allocate some of the rights, responsibilities, and tasks that the board needs to undertake.
You should also ensure that the board is composed of reliable and professional people that you trust and can make critical decisions for your company.
The board of directors issues or designates shares to the delegated shareholders.
Issuance of shares or stock will contribute to the acquisition of capital for the business.
Entrepreneurs should take advantage of the numerous benefits offered by incorporating a business.
They can raise more capital in the company by selling stock, which will ultimately help in the expansion of the business.
Entrepreneurs will also often enjoy lower taxes than on regular personal income.
A corporate entity also has a perpetual succession or existence, and members can transfer their shares to ensure the continuity of the company.
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