What Does Incorporated Mean in Business?

What Does Incorporated Mean in Business?

by Heather R. Johnson, December 2015

When starting a business, the owner can structure that business as a sole proprietor, partnership, Limited Liability Company (LLC), or corporation. Of these business structures, only the corporation is a completely separate legal entity. Consider the many pros and cons before you decide on incorporation.

What Does Incorporate Mean?

Most business owners define incorporate as to form a legal corporation. Generally, incorporate means to come together or to form an indistinguishable whole. In that sense, the owners “come together” to form a new business unit.

What Is A Corporation?

A corporation acts separately from its owners or shareholders. It can sue or be sued. It can file taxes on its own. Profits and losses are taxable to the corporation, not the shareholders. A corporation affords the owners limited liability. And if the owner dies, the corporation lives on.

What Does It Mean To Incorporate A Business?

To incorporate a business means to turn your business into an entity formally recognized by the state. When a business owner decides to form a corporation, that corporation becomes a legal business structure independent of its owner or owners.

The Benefits Of Incorporation

Corporations can raise capital more easily through the sale of stock. Stock can come in different classes, can be used to reward employees in addition to compensation, and can even be publicly traded (if the corporation takes the right steps).

Corporations also have separate credit ratings from their owners. Corporations have access to some tax advantages, such as tax write-offs for employee healthcare and other fringe benefits.

One of the biggest benefits to forming a corporation, however, is liability. Owners have limited liability protection, which means creditors can’t come after an owner’s personal assets to collect a debt. The same applies if the business gets sued.

Disadvantages of Incorporation

Corporations pay higher filing fees than other business entities when incorporating with the state. Corporations must also keep more records, such as Articles of Incorporation, bylaws, resolutions, minutes and annual meeting minutes, communication to shareholders, and annual reports. Check with your local Secretary of State to determine what your state requires.

How To Form A Corporation

First, determine whether to incorporate your business as an S corporation or C corporation. A C corp is the most common entity. It is a separately taxable entity. Tax is paid on the corporate level and at the individual level on dividends. An S corp is considered a pass-through tax entity. It pays no corporate income tax. Instead, the profits and losses of the business are “passed through” the business and reported on the owners’ personal income tax returns. Although C corps have no restrictions on ownership, an S corp is restricted to no more than 100 shareholders, whom must be United States citizens.

Next, determine what state to incorporate in. Most businesses owners incorporate in their home state, but some businesses incorporate in states with key business advantages. Many large companies incorporate in Delaware, for example, because of its advanced business court system. Nevada and Wyoming, two other popular choices, have no corporate income tax, no (or low, in Wyoming’s case) franchise tax, and no state personal income tax.

After you determine the location, appoint directors and a registered agent. The registered agent receives important legal and tax documents on behalf of the business, and they have to be available to get these documents during normal business hours. Choose wisely!

Prepare and file articles of incorporation and other documents per your Secretary of State. Pay the applicable filing fee. Hang out your shingle and celebrate the launch of your new business!

With an understanding of the benefits and risks of incorporation, you can structure your new business in a way that offers you personal protection, cachet in the business world, and potentially higher profits.

LegalZoom will help you incorporate your business when you’re ready. Get started today, just answer a few questions about your business online.