Understanding What It Means to Incorporate

If you are wondering whether incorporating would be the right option to exercise for your business, it could be helpful to understand the elements of a corporation before making that decision. So, let us look at these elements.

The shortest definition of a corporation is that it is a legal entity created by a state filing, which has a separate existence from its owners. It is a creature of legal fiction because it is an artificial entity, which only exists in the contemplation of the law.

A corporation is created when your articles of incorporation have been completed, filed and approved by the proper authority, usually the state?s Secretary of State. Some states call the articles of incorporation a ?charter? or a ?certificate of incorporation?.

Most people are familiar with the ?general partnership? type of business structure. This type of structure is an extension of its owners. Unlike a corporation, a general partnership does not need any formal papers from a state official or agency in order to exist. Thus, if David and Gina decided to jointly operate a corner store without signing any formal agreement between them and without filing any document with the state, they will still be deemed to have a general partnership. It should be obvious then that it is much easier to form a partnership than forming a corporation.

Corporations however, do have distinct advantages over the ordinary partnership. A primary advantage you stand to gain by forming a corporation is limited liability. This means that the owners, who are usually called shareholders in the business, are not generally held responsible for its debts and liabilities. The corporation offers this limited liability protection because it exists as a legal entity, separate from its shareholders. Corporations also file separate tax returns with the IRS, with their profits and losses distinctly separate from their shareholders? income. Profits can be passed on to the shareholders in the form of dividends. The shareholders will be required to pay personal income tax on these.

There are distinct differences between publicly held and privately held corporations. When you incorporate your business it does not imply that you will ? by default - be going public, or that the stock in your corporation will be traded on stock exchanges such as the New York Stock Exchange or NASDAQ. Many people make the erroneous assumption that the term corporation means a large, publicly held company. In reality, there are many more privately held corporations than publicly held ones.

In privately held corporations (or closely held corporations), the ownership of the company is private, meaning that the stock is not offered for sale to the general public. Private companies generally have relatively few shareholders, when compared to the horde of shareholders in public held corporations. Most entrepreneurs who incorporate their businesses establish closely held corporations, often with as few as one shareholder, and keep them closely held throughout the life of the business. One of the biggest privately held corporations in the world is S.C. Johnson Inc.

The option is always there for privately held corporations to go public. Many successful corporations grew out of entrepreneurial dreams and visions in a college dorm room, a basement, or a garage. Hewlett-Packard, Dell and Apple are examples of private companies started by entrepreneurs that grew to be large, multinational, public corporations. Perhaps, in the future, yours too could become a Wall Street favorite.

My name is Ashley Castellanos, and I have been helping Internet business owners set up and run their businesses correctly since 1997. I own Corporation Soft, a company that was created for, and is dedicated to teaching business owners about how to incorporate properly.