Incorporation, while certainly a chore, is not as difficult as many believe. Money must be paid; applications must be filed; laws and regulations must be reviewed and conformed-to; but, overall, incorporation—especially with the assistance of an attorney or incorporation counselor—presents itself as an affordable and efficient means to restructure a business.
Getting Started
First things first: A winning corporation must have a winning sort of name. Laws, however, prohibit some choices. Business cannot, for example, employ a name that is intended to sound “deceptively similar” to an established corporation. In essence, copyright laws forbid you from naming your burger stand MacJohnson’s, or Burger Despot, or Non-Dairy Queen. Instead of hoodwinking consumers through confusing nomenclature, nascent corporations are encouraged to select powerful and confident-sounding titles—like Jewel, or Safeway, or Lucky’s. Remember: A name says a lot; make sure yours says exactly what you want it to say. But, perhaps we’re getting ahead of ourselves. Why choose incorporation? How is the process started and completed?
Advantages of Incorporation
The main advantage of incorporation is limited liability for stockholders and directors—corporations are entities completely separate from their owners; meaning that debts and obligations incurred by a corporation are not settled with the personal possessions of its owners. Sole proprietorships and partnerships are different stories—personal equity can be billed to settle accounts; meaning that if wading in debt, an owner’s house might be up for grabs. Incorporation additionally creates a centralized management structure: Shareholders own the corporation, but are not able to run said business. Instead, stockholders elect, remove, and censure directors during state law-required annual meetings. Directors, in turn, handle the larger decisions of the corporation—chief among these decisions is the hiring of officers (Chief Executive Officer and Chief Financial Officer being the most important and well-known).
Other advantages include: Corporations, due to their independence from owners, do not suffer under the mortal limitations of partnerships and sole proprietorships—to wit, McDonald’s did not die out when old McDonald did. And, speculation of earnings and growth (sale of stock) perennially fill the coffers of corporations with crucial capital.
Disadvantages of Incorporation
The most salient disadvantage of incorporation is the double-taxation of profits. Tariffs are initially collected depending upon corporate production and sales, and taxes are additionally required of shareholders when a corporation’s profits are annually disseminated in the form of dividends. There is, of course, a boon of tax shelters and deductions available to incorporated businesses, but double-taxation gives many businesses second thoughts about incorporation.
If decided upon incorporation, the best advice one can give is to seek the professional help of an attorney or filing service (www.bizfilings.com is one such resource). Business owners can, of course, go-it-alone when filing for incorporation, but, generally speaking, it’s a good idea to entertain some experienced guidance. In addition, fees will need to be culled and paid to state authorities, as well as initial franchise taxes (tariffs generated by any number of variables including sales, gross production, and stock and capital value)—incorporation isn’t a picnic, but rather a well-informed business decision dependent upon certain specifics. This facilitates the need for professional advice (mine is quite amateurish), just be sure you have the name already picked out.
By Jean-Pierre Lacrampe