Before we understand incorporation, first, we must know what a business is. Business refers to individuals, organizations, and enterprises engaging in commercial, professional, and professional activities legally. What is the purpose of engaging in such activities? Primarily, the intention behind engaging in such commercial activity is to generate profit. However, there are non-profit entities that engage in such actions to solve social problems or accomplish a charitable duty.
Based on ownership, there are three types of business ownerships. Those are the “Sole Proprietorship,” where an individual owns the business. Then there is Partnership. In a partnership business, the business is owned by more than one person. All the people involved in the business provide the resources necessary to run the business.
Finally comes corporation, and most businesses you see are different are corporations. Corporations have separate legal entity than the people running it.
Everything You Need to Know about Incorporation
What is Incorporation?
Unlike sole proprietorship and partnership businesses, forming a corporation is very different. Incorporation refers to the legal procedure one has to go through to create that separate legal entity, also called a corporation.
What does this legal entity do? This legal entity, created through incorporation, separates the company’s assets and liabilities from its owners. Aside from assets and liabilities, the income of the owners is also separated from that legal entity.
When the company does business, it is done under that legal entity, which is the company and not with the name of the owner. Now, how will you understand which is a company and which is not? If you want to identify a company with its name alone, look for “Inc” or “Ltd. (Limited),” at the end of its name. Through incorporation, the company gains that legal entity.
How is an Incorporation Created?
As discussed before, through incorporation, a company is created. Incorporation is related to the legal procedure to create a company. Incorporating a company revolves around the “Articles of Incorporation.” The articles of incorporation refer to the necessary documents that are needed to create a company.
The papers are usually filed with a government body. These documents contain essential information about the company. The articles of incorporation include information such as the name of the firm, where the firm is situated, and other fundamental details like these. However, the information on the type of stock issued by the company separates the public company from a private company.
Public companies can issue stocks; on the contrary, private companies can’t. Aside from this, most other information is similar for both private and public companies. Articles of incorporation have different names like “Corporate Charter” or “Certificate of Incorporation.” Its shareholders control public companies. While a smaller business might have a small number of shareholders, a large firm has a vast amount of shareholders.
Through incorporation, shareholders will only receive payment for the shares they bought. It’s up to the owners to distribute the generated revenue among the company’s shareholders. This part of the profit that the shareholders receive is called dividends. Shareholders also possess the power to elect directors for the company. Through issues shares, shareholders are essentially buying a small piece of the company and, therefore, gaining the ability to elect a direct and voice their opinions at the annual general meetings.
Unlike shareholders, directors are in control of the company, as they contain the majority of the shares. That’s why it is on the directors of the company to take care of the company and president over its everyday activity. The directors must conduct their daily task in such a manner which benefits the company, by generating a profit and increasing the value of its shares. Sole proprietary businesses will generally have only one director, but that is not the case for larger firms and corporations. Usually, a company consists of at least a dozen or more directors.
Benefits of Incorporation
What is so special about a company that there are so many of them nowadays? There are benefits to owning a company. Discussed earlier, through incorporation, a company gains a separate entity. This conception of a separate entity differentiates a company from the other types of business.
In the case of sole proprietary or partnership business, the business debt means the owner’s debt, and the business er liability also becomes the liability of the owner. Furthermore, when a lawsuit is brought against this business, it is brought against the owner of the business. However, that’s not true for a company.
The separate entity of the company shields its owners from such things. When it comes to debts and liabilities, it’s the company’s debt and liability, not the owners. In case of bankruptcy, the owner’s assets won’t be in danger. The debt will be paid through the assets of the company.
Aside from shielding the owner’s assets, incorporation makes it easy to transfer the ownership of the company. Anyone with the majority of the shares issued by the company can become the owner, and it also allows the company to be sold to another party. Another great feature achieved through incorporating is the lower tax rate on personal income.
Unlike other businesses, because of running a company, the owners get to enjoy a lower tax rate on their income. That’s not all, in case of loss, the company isn’t obliged to pay any income taxes. The company has the advantage of carrying the loss into the future or transfer its losses to another company.
The main advantage of incorporation is that companies can take on larger or riskier projects without putting the owner’s assets on the line. Through issuing shares, the company collects the necessary money for investments from the shareholders. This advantage allows them to take on larger projects without worrying about where the investment will come from.
This is a massive advantage to have, and it is only accessible by public companies. The other advantage of incorporation is the corporate veil. Because of the corporate veil, other parties cannot bring lawsuits against the owners of the business, but bring it to the company itself.
In conclusion, incorporation gives a company significant advantages that other businesses don’t have.