Once you get your business off the ground and running smoothly you may think that all the big decisions associated with starting the company and its structure are behind you. But there are still always things you can do to restructure and some may be greatly to your benefit. One of these decisions you may be faced with is whether to incorporate.
Why Incorporate?
Incorporating is a decision related to the legal structure of your business and may to your benefit. The decision to incorporate may not have a big change on the day-to-day functions or your company it may be very evident when it comes to be tax time, evident in a good way that is. Other times incorporation comes into play is if you apply for a loan or become involved in some type of lawsuit.
Legally, when you incorporate, it means that company is an individual unit from the owners which protects them from any type of personal accountability for any type of debt or other responsibilities. Yet be aware that there are some exceptions and protection is not always guaranteed in all situations and if one personally does something wrong they will be held responsible regardless.
The involvement of many investors in your company may be directly correlated to the amount of responsibility they would be under in the case some bad occurs with the company. Some people may be more inclined to invest in your company if they know that they can own the company on paper by contributing the most money to it, but are excused from other responsibilities.
Incorporating also means that the company is not as tied to the lives of its members; meaning that is one of the members dies or sell their shares the company will still operate.
The Process of Incorporation
To being the process of incorporation, an attorney is not required yet it is not a bad idea to get advice from an expert to make sure you have covered all your bases. First thing you have to do to incorporate is to file articles of incorporation with the appropriate state authority. Another thing you have to do but not file is to make up corporate bylaws that address the rules that administer corporate life in accordance with state laws.
You also need to distribute stock certificates that will provide documentation of owner’s interests in the company and thus making certain that the shared are justified with the federal securities law and the requirements of the state in which you file.
Types of Corporations
There are four main types of corporations: general, close, s and limited liability corporations.
- General Corporations- These are the most common and means that as a legal entity the corporation is owned by an limitless amount of stockholders who are personally not responsibly for debts or other business related responsibilities.
- Close Corporations- These contain a small amount of shareholders (about thirty to fifty) many of whom participate in the running of the business.
- S Corporations- These offer the good parts of incorporation but get rid of “double taxation” which means the profits are taxed first as income to the business and again as income to the shareholders when profits are distributed as payments. These are also only allowed to have less than seventy-five shareholders.
- Limited Liability Company (LLC)- This is a business made with filing articles of organization with state authorities. They commonly give limited responsibility to member and get taxed like a partnership which prevents the company from double taxation.