If you’re seeking to incorporate a new business, you’re probably unfamiliar with the typical steps involved. There are forms to fill out, processes to go through, and fees to pay. Additionally, you may not be aware of the specific queries you need to ask when it comes to legal matters. By the end of this post, you should know what to do when you start the process of incorporation.
- What Is Incorporation?
- Why Incorporate?
- Inc. And LLC: How Do They Differ?
- A Step-by-Step Guide to Incorporating a Business
What Is Incorporation?
Incorporation is the process wherein a new business or organization incorporates as a company. The company, which was once an unincorporated entity, becomes a corporation and is now subject to the laws and regulations of that country’s corporation law. The term may also refer to the act of organizing a business by forming a separate legal entity that limits its owners’ liability for claims against it.
Incorporation provides numerous advantages. The most notable ones are tax savings, limited liability, and freedom from standard law rules. Some additional benefits include:
- Protects You From Liability: One of the benefits of incorporation is that it protects from liability. It allows the company to be sued, but not its shareholders or members. The law states that when a corporation is formed, a shareholder cannot be held personally liable for any debts or obligations of the company. However, this does not hold in all cases. The amount of liability varies depending on the type of lawsuit and other factors. Nonetheless, it offers a high degree of personal protection.
- You Can Incorporate In Tax-Friendly Countries: When you incorporate your business, you can choose which country you wish to do so in (as long as it is not on any entity list). Taking advantage of low-tax countries is the most significant benefit of doing business abroad. For example, many companies incorporate their company in Singapore because it is widely recognized as a business-friendly destination. If you are interested, you can learn more about the process of incorporation in other countries online. There is plenty of information to be found; just make sure to choose wisely since some countries are more accessible to integrate into than others.
- There Is A Separation Of Corporate And Personal Taxes: The most common reason why people opt for incorporation is that they are looking to avoid double taxation, which occurs when income is taxed both by individuals and corporations. Tax rates for corporations and individuals differ, and separating your income from your business allows you to pay less tax overall.
- Raising Capital Is Easier: Incorporating gives your business a sense of legitimacy and makes it easier to raise capital and qualify for loans. For small business owners, incorporating also allows them to open bank accounts and establish credit lines, which is essential if you want to scale rapidly.
- Incorporation Facilitates Succession Planning: A sole proprietorship’s net assets will go to its heirs upon death, but contracts and leases aren’t passed on. On the other hand, if a corporation is planned correctly, its contracts and agreements will remain valid even if an owner returns or the ownership changes. Therefore, the company can transfer corporate shares to successors, which is an advantage when the time comes.
Inc. And LLC: How Do They Differ?
The difference between an LLC and an Inc. is that the first is a limited liability company while the second is a corporation. An LLC is considered a “limited liability company”, and its members are generally shielded from personal liability related to its activities. This includes civil lawsuits brought by creditors, injuries sustained by members who work for the LLC, and lawsuits against other members. The LLC itself does not need to be operated by members, but it needs at least one member with legal authority to act on behalf of other members.
An Inc. stands for a corporation and refers to the type of company where ownership has been transferred to other people called shareholders or owners, which means they have voting rights and receive income or share in profits from its operations. There are many minor differences between these two types of companies, but it mostly comes down to how they are managed and their tax status.
A Step-by-Step Guide to Incorporating a Business
There are numerous steps to take in the process, but as long as you understand each step and what you must present, everything should go smoothly.
Ensure Compliance With Licensing And Zoning Laws
You must check the local zoning and licensing requirements before you begin incorporation. The majority of businesses do not need permits or licenses to operate. However, businesses in regulated industries such as food services and child care do. To avoid problems once you incorporate your business and begin running it, make sure your company is compliant with local laws.
Research The Name Of Your Business
When you start this process, it’s essential to know that you have to register a business name. However, this process can be tedious and time-consuming. To find a suitable business name, you must research the industry and your competitors in the same field. It would be best if you also considered what your target audience thinks about your company. The name you choose for your business should be easy to pronounce in any language and stand out from other companies in the same niche. You won’t be permitted to use the same corporate name as another company in your local area because that might confuse consumers. A similar business name to another could be considered trademark infringement, which can land you in legal trouble. Corporations must add a designation to the end of their names, such as Inc., Co., or Corp.
Provide The Name Of The Registered Agent
A registered agent can also be an attorney, someone who has experience with the law. Registered agents are usually located within the state of incorporation, and they are responsible for processing documents for companies they represent. The duties of a registered agent include being available to answer questions about the business’s filings and assisting with any changes in its status without charge. They usually act as the company’s legal representative.
They are typically appointed by the corporation’s board of directors and may be compensated by the company for their services. This includes legal advice, conducting business transactions, filing documents with government agencies, serving documents related to lawsuits or other civil suits, and preparing court pleadings if necessary. Additionally, they are sometimes in charge of filing tax returns and contacting the Internal Revenue Service (IRS) on behalf of the company. When they file taxes, they must report any income from their client’s business which the IRS can use to track taxable income.
Draft Provisional Articles Of Incorporation
Articles of incorporation are the first legal document that states the terms and conditions under which a business can be run. These articles are used to set out the legal details of a new company, but they’re also commonly used for existing companies. A new company may need to file an Articles of Incorporation before it begins operations. In contrast, existing companies may want to update their Articles of Incorporation after some changes have been made. Articles of Incorporation allow businesses to communicate their corporate structure with the government and other interested parties. This includes communicating which shareholders hold controlling interests in the company or making sure that taxation rules are followed.
File Your Completed Articles Of Incorporation
As soon as you have drafted and reviewed your Articles of Incorporation, you will need to submit them with your state. You can use various services for this process or use your registered agent to file them on your company’s behalf.
Corporate Bylaws Should Be Drafted
These bylaws serve as a guideline for all internal and external relationships within the company. The bylaws are usually written in a set of articles, which will guide how a corporation should be run. In the past, corporate bylaws were only manual documents written by hand and signed by officers of an organization. Nowadays, companies use software to keep track of their corporate bylaws automatically updated every time an officer signs on a document. To avoid violating the law of any jurisdiction, corporate bylaws should be consistent with the relevant law.
Establish A Corporate Records Book
Documents in your corporate records book demonstrate to the state that you are operating within the rules of the IRS and state laws. Among the things you must include in the document are:
- The company’s articles of incorporation.
- Corporate bylaws.
- Minutes of annual meetings of shareholders, board members, and the board in general.
- Transactions involving stocks.
- Reports for each year.
- Documents related to business loans.
- A copy of every contract entered into by the company.
- Commercial property transactions carried out by the company.
Meet For The First Time As A Board
First meetings are often used to get all of the key stakeholders together at one time. This allows them to get acquainted with each other, assess how they are doing, and set goals for the future. Also, they are used to ensure that each team member understands what they are expected to do and what they expect from you.
Hopefully, this step-by-step guide for incorporating your business can provide you with some benefits. From understanding what it means to incorporate the actual steps involved, you’ll be well on your way to starting up your own business if you follow these steps.