The Benefits of Incorporating a Business
Incorporation is a legal process that grants businesses certain legal, financial and tax benefits. It’s a smart decision for businesses of any size who are looking to raise capital, protect their assets, and structure their organization within the law. Benefits of incorporating include:
- Limited Liability Protection: Incorporating a business protects owners from personal liability for business debts and obligations. This means that in case of legal disputes or unpaid debts, business owners won’t have to personally cover any losses incurred by the business.
- Tax Advantages: Incorporation allows businesses to take advantage of certain tax deductions. Many businesses can also take advantage of taxation incentives such as the ability to limit their capital gains tax liability.
- Raising Capital: Incorporation makes it easier for businesses to attract investors, creditors and other financial partners. The legal structure of the business makes it easier for potential financiers to understand the business’ operations, making them more likely to invest.
- Increased Credibility: Incorporating gives your business greater credibility. It can help to improve relationships with customers, partners and other stakeholders, as they may view the business as more reliable and trustworthy.
Steps to Incorporate a Business
Incorporating a business is a multi-step process that can be complex, but it is also relatively straightforward. Here are the basic steps that must be completed to incorporate:
- Choose Your Business Name: The first step is to pick a name that will identify your business and will be officially registered as the legal name of the business. It should preferably have something to do with the products you’re selling or the service that you offer.
- File the Incorporation Documents: The next step is to file the necessary paperwork with the appropriate government agency or the Secretary of State in your state. This paperwork is often referred to as the Articles of Incorporation or Certificate of Incorporation.
- Appoint Directors and Officers: The next step is to appoint the directors and officers of the corporation. These roles are filled by people who will be responsible for setting corporate policies and overseeing the day-to-day operations of the business.
- Create Corporate Bylaws: Bylaws are the set of rules and regulations that govern the company’s operations. These rules should include how decisions are made, the rights and responsibilities of the officers, as well as the rules for owning and transferring stock in the company.
- Obtain Any Necessary Licenses and Permits: Depending on the nature of the business, additional licenses and permits may be required in order to operate legally. These include permits from the local municipality, state agencies, and federal government.
Incorporated vs. Unincorporated Businesses: Key Differences
The biggest difference between incorporated and unincorporated businesses is the way they are treated under the law. Incorporated businesses are viewed as separate legal entities from their owners, while unincorporated businesses are not.
In unincorporated businesses, the owners are personally responsible for all debts, obligations, and liabilities of the business. This means that their personal assets, such as vehicles, homes, and investments, can be seized to pay business debts. With incorporated businesses, the owners’ personal assets are generally protected from business losses.
Incorporation also offers additional legal benefits, such as legal protection from lawsuits and the ability to hire employees. It also offers tax benefits, as incorporated businesses are often taxed at a lower rate than unincorporated businesses.