In the United States, there are over 1.7 million traditional C corporations. Many of those are businesses you may have heard of, such as Walmart, Amazon, and Apple. If you are someone dreaming of owning your own successful business, you might be wondering about incorporating.
So, what does it mean to incorporate a business, and is it the next best step for you?
What Does It Mean to Incorporate a Business?
Incorporating refers to the legal process that it takes to form a corporation. When you incorporate a company, you are forming a separate and legal entity. This means that the business operates separately from its owners. It separates income and assets from owners.
Formation
To start this legal process of incorporating a business, you must file the proper paperwork with the state of government in the area you wish to incorporate in. Articles of incorporation must be drafted, including the purpose of the business, location, number of shares, and class of stock, if any.
Types of Corporations
Depending on your location of incorporation, there are several different types of corporations that you can form.
The more common is a “C” or “S” corporation. These describe the federal tax election made by the business. As a C corporation, the business pays taxes, and the owners pay taxes on their income. As an S corporation, the owners report revenue as income, and they are then taxed.
Other types include:
- Regular corporation
- Statutory closed corporation
- Quasi-closed corporation
- Professional corporation
- Non-profit corporation
A closed corporation refers to one that does not issue stocks.
Liability
As we discussed, forming a corporation removes the entity from its owners. The owners then have limited liability protection. This means that they are only responsible financially for what they have personally put into the business.
However, if they were to participate in illegal activities regarding the business, they would be held responsible.
Stock
Incorporated businesses have the ability to issue stock to shareholders and employees. Due to the limited liability nature, investors may be more willing to buy-in. Stocks can be used as incentives for good performance by employees. Any unissued stock can be sold to generate money for the business.
Formalities
These types of businesses must hold director and shareholder meetings. They must also keep the company minutes, thorough banking records, and file taxes within their state of the organization.
Benefits of Incorporating
When it comes to why to incorporate, there are many key advantages. Some of those advantages are:
- Usually has a lower tax rate than that of personal income
- Easily transferred ownership
- Ability to raise capital through the sale of stock
- Personal asset protection for owners
- Some more lenient tax restrictions on losses
- Enhanced credibility
- Exists beyond the lifetime of the owners
- Grants anonymity to owners
Grow Your Business
There are many successful businesses that are corporations. As a potential or current business owner, it is important that you know the answer to what does it mean to incorporate a business. Being business savvy will take you to new heights. Could it be the next “Walmart”?
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