Incorporation

What is incorporation?

Incorporation is a legal method that business owners can use to separate their business from their personal finances and liabilities. By incorporating, business owners can reduce their personal liability for activities the business engages in and any business debts or financial hardships the business experiences. 

There are several ways to incorporate and register a business as a proper and separate business entity. This includes the following:

• S corporation. Forming an S corporation lets business owners turn the company into its own legal entity. These corporations offer businesses and their owners certain corporate tax benefits as long as the company meets eligibility requirements.
• C corporation. Forming a C corporation lets business owners appoint an unlimited number of shareholders. However, this formation is subject to double taxation on gross profits earned and shareholder dividends paid.
• Nonprofit corporation. For companies operating as charities, educational organizations, and other similar sectors, nonprofit formations can give them additional tax breaks. However, the company must meet strict qualification requirements, and profits can’t be distributed to organization members or directors.

FAQs

Does LLC mean you’re incorporated?

No. Forming a limited liability company (LLC) doesn’t mean you’re incorporated. It does, however, mean that you’re protecting yourself and your personal assets from liability if the company experiences financial difficulties. LLCs can have fewer requirements in place, making them easier and cheaper for business owners to establish.

What are the benefits of incorporating a business?

Incorporating a business can help business owners in several ways, including the following:

• Reduced liability for business owners and shareholders
• Continued existence of the company even if the original founders sell to a new person or group
• Improved credibility for fundraising and attracting new investors
• Clear and understandable rules of government and operations for owners to follow, providing consistency and stability

Can a company operating as a sole proprietorship incorporate?

Yes. Sole proprietors can incorporate their one-person businesses. Doing so can protect personal assets more effectively and may help you take advantage of certain tax savings. However, it’s a good idea to speak with a business formation attorney to learn more about your options.

When should a business incorporate?

Businesses can incorporate before they open their doors. However, if a business has been operating without being incorporated, it may want to incorporate before hiring employees or expanding into a new location. This can help protect the business owners and the business in the long run.