What does 'incorporated' mean?
Ever wonder why some company names have 'Inc.' at the end? It's not just a fancy abbreviation companies tack on to sound official. 'Inc.' stands for incorporated, and it means that the company has gone through the legal process of incorporation. When a company incorporates, it means that it has formally registered with the government as a corporation. Incorporating your business comes with a lot of benefits. As an incorporated company, you're considered a separate legal entity from your personal assets. This means if someone sues your company, your personal assets like your home and savings are protected. Incorporating also makes your company look more professional and established to customers and partners. While the incorporation process does require some paperwork and fees, for many businesses the benefits of incorporating far outweigh the costs. If you run your own business, incorporation is something you should seriously consider.
What is incorporation?
Incorporation means legally establishing your business as a corporation. When you incorporate, your business becomes a separate legal entity from you as the owner. This is important because it protects your personal assets in the event of business debts or lawsuits.
How to Incorporate
To incorporate, you'll need to file articles of incorporation with your state. This establishes your business as a corporation in the eyes of the law. You'll have to pay a filing fee, which varies by state. You'll also need to establish bylaws, elect a board of directors, and hold an initial board meeting.
While incorporating does require some paperwork, the benefits to your business can be well worth it. Talk to your accountant or a business lawyer to determine if incorporating is the right choice for your company. They can walk you through the process and ensure it's done properly.
Is incorporation necessary?
Incorporating your business is not always necessary, but it does come with some benefits. As a sole proprietorship or partnership, you have unlimited personal liability for your business. This means your personal assets are at risk if your business is sued or cannot pay its debts. By incorporating, you limit your personal liability and protect your personal assets.
Incorporating also gives your business a more professional image. Becoming an “Inc.” or “Corp.” establishes your business as a legal entity separate from its owners. This can make it easier to raise investment capital and apply for business loans. Incorporation may also provide tax benefits, as incorporated businesses can take advantage of lower corporate tax rates.
However, incorporating does come with costs like filing fees, ongoing reporting requirements, and often higher tax complexity. For a small business, these extra costs may outweigh the benefits of incorporating. Many sole proprietors and partnerships operate successfully without incorporating.
Before you decide to incorporate, weigh the pros and cons for your specific business. Talk to your accountant or lawyer to determine if the limited liability and other benefits of incorporating are right for your needs. If you do incorporate, you’ll need to file articles of incorporation with your state and establish bylaws to govern your new corporation. But with the right planning, incorporating can be a smart step towards building a thriving business.
Why Companies Choose to Incorporate
When starting a business, one of the biggest decisions you’ll make is whether or not to incorporate. Incorporating your company—making it a corporation—comes with some major benefits.
Tax and Liability Protection
Two of the main reasons businesses choose to incorporate are tax and liability benefits. As an incorporated company, you can take advantage of certain tax deductions and benefits that may lower your tax burden. Incorporating also protects the owners’ personal assets from the company's liabilities or debts. Creditors can only go after the corporation's assets, not the owners’ personal assets.
If you want to raise money from investors to help grow your business, incorporating makes it easier. Corporations can issue shares of stock to investors, allowing them to invest in the company. Corporations also have an easier time getting business loans and lines of credit from banks and investors.
Incorporating projects a more professional image for your business. The formal corporation structure signals to customers, employees, and partners that you are an established, reputable company. Using “Inc.” in your business name announces that you are incorporated. This lends credibility and a perception of competence.
As you can see, for many business owners the benefits of incorporating far outweigh the costs. While the decision is complex with many trade-offs to consider, incorporating could be one of the best moves you make for your company’s success and longevity.
Steps for Incorporating Your Business
Once you’ve decided to incorporate your business, it’s time to take action. The incorporation process typically involves several steps:
Filing Articles of Incorporation
The first step is to file articles of incorporation with your state. This establishes your business as a legal corporation. You’ll have to provide information like your corporation’s name and purpose, number of shares, and directors. There is usually a filing fee for this step, which varies by state.
Appointing Directors and Issuing Shares
Next, you’ll need to appoint directors to oversee your corporation’s activities and issue shares of stock to shareholders. The directors and shareholders do not need to be the same people. Decide how you want to split up ownership and control of the company.
Bylaws establish the rules that govern how your corporation will run. They specify things like when shareholder meetings will be held, voting procedures, the roles and duties of directors and officers, and more. You’ll want to create comprehensive bylaws to ensure your corporation operates properly.
Holding a Board of Directors Meeting
Once the above steps are complete, you must hold an initial board of directors meeting. At the first meeting, the board will approve bylaws, appoint officers, authorize the issuance of shares, and handle any other necessary business to officially launch the corporation.
There may be additional requirements in your state like obtaining business licenses or permits, opening corporate bank accounts, and designating a registered agent. Make sure you understand and complete all necessary steps to legally establish and operate your corporation.
In summary, incorporating your business is a multi-step process, but taking it step-by-step will ensure it’s done properly so you can get off to a good start. If at any time you have questions, don’t hesitate to speak with an attorney.
How to form your business entity
Once you’ve decided to legally establish your business, it’s time to choose a business structure. The most common options are sole proprietorship, partnership, and corporation. For many small businesses, incorporating as an LLC or corporation offers significant benefits.
Forming a Corporation
To form a corporation, you’ll need to file articles of incorporation with your state. This establishes your business as a separate legal entity. As a corporation, your personal assets are protected, and your business can have an unlimited lifetime.
After incorporating, you’ll need to establish bylaws, elect a board of directors, issue stock shares, and hold an organizational meeting. You’ll also need to obtain necessary business licenses and permits to operate.
As a corporation, you have the option to become a C corporation or an S corporation. C corporations have their profits and losses taxed at the corporate level. S corporations pass profits and losses to shareholders to be taxed at the individual level. For most small businesses, S corporation status offers the best tax treatment.
To maintain your corporation, you must hold annual meetings, keep records of major business decisions, and file an annual report with your state. You’ll also need to pay an annual franchise tax.
While the process of establishing and maintaining a corporation may seem complicated, the benefits of limited personal liability and tax flexibility make it an attractive option for many growing businesses. With some upfront work, you can ensure your corporation is set up properly and keep it in good legal standing year after year.
FAQs on Incorporations
One of the most frequently asked questions about incorporating a business is—what exactly does it mean? Incorporating means legally establishing your business as its own separate entity. An incorporated business, like an LLC or corporation, is considered a “person” under the law.
What are the benefits of incorporating?
There are several key benefits to incorporating:
- Limited personal liability. As an incorporated business, your personal assets are protected if your business is sued or has debts that can't be paid. Creditors can only go after the business assets.
- Tax benefits. Incorporated businesses can take advantage of certain tax deductions and lower tax rates. You may be able to save money on both income taxes and self-employment taxes.
- Professional image. An incorporated business appears more official and established to customers, vendors, and investors. This can help build credibility and trust in your company.
- Access to capital. It is easier to attract outside investment and get business loans as an incorporated entity. Investors and lenders see incorporated businesses as lower risk.
- Ownership flexibility. In a corporation, ownership interests are represented by shares of stock, which can be readily bought, sold, or transferred. This makes it easy to raise funds by issuing more stock or bring on new owners.
- Business continuity. An incorporated business continues to exist even if an owner retires, passes away, or sells their shares. The business itself has an indefinite lifetime.
In summary, incorporating your business establishes it as a legitimate, separate legal entity and opens up more opportunities for growth and success. While the process does require paperwork and ongoing requirements, for many business owners the benefits of incorporating far outweigh the costs.
So there you have it. Incorporating your business is a big step, but an important one if you want to establish a legal entity separate from yourself. While the paperwork and fees may seem tedious, incorporating can provide substantial benefits like liability protection and tax savings that make the hassle worthwhile for many businesses. Now that you understand what incorporated means and how the process works, you can decide if incorporating your business is the right move. If you do decide to take the plunge, make sure to do your research to determine which corporate structure—like an LLC or corporation—best fits your needs. Congratulations on taking your business to the next level!