Incorporation (business)
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This article or section deals primarily with United States and does not represent a worldwide view of the subject. Please improve this article or discuss the issue on the talk page. |
Incorporation (abbreviated Inc. in U.S. business names) is the forming of a new corporation. The corporation may be a business, a non-profit organization or even a government of a new city or town. This article focuses on the process of incorporation, see also corporation.
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[edit] Incorporation in the United States
[edit] Legal benefits
- Protection of personal assets. Safeguarding personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the liabilities of a business such as loans, accounts payable, and legal judgements. In a corporation, however, stockholders, directors and officers typically are not liable for their company's debts and obligations. They are limited in liability to the amount they have invested in the corporation (eg: If $100 in stock was purchased, no more than $100 can be lost). Corporations and Limited Liability Companies (LLCs) may also hold personal assets like houses, cars or boats. If one is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of the owner of a corporation or LLC cannot seize the assets of the company, however, they can seize their ownership shares in the corporation, as that is considered a personal asset.
- Transferable ownership. Ownership in a corporation or LLC is easily transferable to others, either in whole or in part. Some states' laws are particularly attractive to this end. For example, with a Delaware Corporation, the transfer of ownership in a corporation is not required to be filed or recorded.
- Retirement funds. Retirement funds and qualified retirement plans (like 401ks) may be set up more easily with a corporation. Corporations can also fully deduct the cost of paying its owner's health insurance.
- Taxation. In the United States, corporations are taxed at a lower rate than individuals. Also, they can own shares in other corporations and receive corporate dividends 80% tax-free. There are no limits on the amount of losses a corporation may carry forward to subsequent tax years. A sole proprietorship, on the other hand, cannot claim a capital loss greater than $3,000 unless the owner has offsetting capital gains.
- Raising funds through sale of stock. Capital from investors can be raised for corporations easily through the sale of stock.
- Durability. A corporation is capable of continuing indefinitely. Its existence is not affected by the death of shareholders, directors, or officers of the corporation.
- Credit rating. Regardless of an owner's personal credit scores, corporations acquire their own credit rating, and build a separate credit history by applying for and using corporate credit.
[edit] Steps for incorporation
- The filing of the Articles of Incorporation (also called a Charter, Certificate of Incorporation or Letters Patent). The first step is to check with your state's corporate filing office (usually either the Secretary of State or Corporations Commissioner) and federal and state trademark registers to be sure the name you want to use is available. You then fill out a preprinted form (available from commercial publishers or your state's corporate filing office) listing the purpose of your corporation, its principal place of business and the number and type of shares of stock. You'll file these documents with the appropriate office, along with a registration fee which will usually be between $200 and $1,000, depending on the state.
- How to Select a Corporation's Name. A corporate name is generally made up of 3 parts: "Distinctive element", "Descriptive element", and a legal ending. All corporations MUST have a distinctive element and a legal ending to their names. Some corporations choose not to have a descriptive element. In the name "Tiger Computers Inc." the word "Tiger" is the distinctive element; the word "Computers" is the descriptive element; and the "Inc." is the legal ending. The legal ending indicates that it is in fact a legal corporation and not just a business registration or partnership. You can choose from the following words: Incorporated, Limited and Corporation, or their respective abbreviations: Inc., Ltd. and Corp.
- You'll also need to complete (but not file) Corporate Bylaws. These will outline a number of important corporate housekeeping details such as when annual shareholder meetings will be held, who can vote and the manner in which shareholders will be notified if there is need for an additional "special" meeting.
Taxation - Corporations can only deduct net operating losses going back two years and forward 20 years
[edit] Reporting after incorporation
- Assuming your corporation has not sold stock to the public, conducting corporate business is remarkably straightforward and uncomplicated. Often it amounts to little more than recording key corporate decisions (for example, borrowing money or buying real estate) and holding an annual meeting. Even these formalities can often be done by written agreement and don't usually necessitate a face-to-face meeting.
You may also be required to file an annual report with the Secretary of State's office of the states you are incorporated and authorized to transact business in. Annual Report Requirements (due dates, information the Secretary of State requests, fees) vary from state to state. For specific information on your company contact the state you are incorporated in or qualified in or request assistance from any number of Annual Report Service Companies like Annual Registration Management Services, LLC or CT Corporation.
[edit] International perspective on incorporation
The legal concept of incorporation is recognized all over the world. In the United States, corporations are identified by the term "incorporated" added after the business name, such as "Texas Instruments, Incorporated", or by putting the word corporation in the name of the company, as in "Netscape Communications Corporation". In Germany, Austria and Switzerland the GmbH ("limited liability business association"), as well as the AG ("stock market traded business association") are the most common comparable concepts. In the United Kingdom the titles Ltd. (abbreviation for limited company) or plc (abbreviation for public limited company) are used for corporations. In France, Spain, Portugal, Poland, Romania and South America the title S.A. is used for corporations. Denmark and Norway uses the title A/S for stock corporations (Danish: Aktieselskab, Norwegian: Aksje Selskap), while Sweden uses the similar AB (Swedish: aktiebolag). Italy uses "Srl", or "Società a Responsabilità Limitata" (limited liability company) and "SpA" or "Società Per Azioni" (stock corporation). The Netherlands uses NV. Singapore uses Pte. Ltd., meaning "private limited" which is the equivalent of a U.S. incorporated entity.
