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Have you ever wondered what the “Inc.” in a business name means? Perhaps the first thing that comes to mind is Monsters Inc. and its many employees and facilities.
Incorporation is a feature of the business landscape well worth exploring, and so we’ve put together a few answers to your basic questions so you can understand what incorporation is and how it works.
- Incorporation is the process of establishing a business as an entity in its own right, separate from its owners.
- Incorporation separates business assets and capital from its owners and transitions the business to corporate taxation and regulation laws.
- Incorporation makes it easier to raise capital or divest from different business assets.
- You’ll need to file articles of incorporation to make the transition legal and effective.
What is Incorporation?
Incorporation is the process of establishing a business as an entity in its own right, separate from its owners.
Incorporation has existed in one form or another for over 2000 years; even the ancient Romans had a similar concept!
Incorporation means that the business exists independently of its owners and so can continue trading even after they move on to new projects, are bought out – or in the case of centuries-old corporations – after the original owners die.
Depending on where you live and the structure of your business, you will need to check local regulations to assess when you need to register your business and when you should look to incorporate it.
Incorporation offers benefits like limited liability and tax changes that can protect yourself and your business.
This occurs through separating your business from yourself and establishing it as its own legal entity.
You must file articles of incorporation, which are a detailed business structure document and outline and will detail the number of shares on offer and their value.
Many of the big-name businesses you know have been incorporated. It’s what allows them to carry on doing business even after the original owners move on or the business is acquired by another corporation.
Apple Inc., creator of the ubiquitous iPhone, was incorporated on April 1, 1976, in Los Altos, California.
By doing this, founders Steve Jobs and Bob Wozniak were able to raise capital for their venture, lower their personal tax rates, and separate their personal assets from their business assets.
Apple continues today as a corporation nearly 50 years later.
Stretching even further back, Coca-Cola was incorporated in 1892 in Atlanta – allowing it to last longer than any of its founders (and indeed longer than any human lifetime).
Raising $10,000 in capital during incorporation, Coca-Cola has gone on to be the largest beverage seller in the world.
Finally, Martin Eberhard and Marc Tarpenning incorporated Tesla on July 1, 2003, in San Carlos, California, long before Elon Musk was ever in the picture.
Having just passed 20 years of business, Tesla is still going strong.
How to Incorporate a Business
There are generally the same requirements for incorporating a business in the United States no matter where you live, and the key steps will ensure you can raise the capital you need and protect your business.
- You must incorporate a business somewhere. The United States is a big place, and different states offer different benefits for registering a business. You’ll need to do your research to find out where to go to best suit your needs
- You must define your corporate structure, and who holds what positions within it
- You must select an original business name to be incorporated under. This means all your legal and corporate documentation and public records will be attached to this name, providing a continuous chain of provenance for any records
- You must appoint a registered agent to act as the point of contact between the government and your business. Their job is to transfer legal documents and records and represent the business in the incorporation process
- You must file articles of incorporation that detail everything about your business. What it does, how it operates, who does what, and demonstrates that you meet the legal requirements for incorporation
- You must establish corporate bylaws – the internal rules governing the management of your business. Think of it as a constitution for the running of your corporation
- You must schedule annual board meetings, and then hold them when their time comes up
- You may also find that there are additional requirements you must fulfill based on the jurisdiction you are incorporating.
You can do all of this work yourself, or engage an incorporation service like LegalZoom to get your business up and running quickly if you find yourself overwhelmed!
Pros and Cons of Incorporation
|Protects personal assets from business liability
|Greater regulation and bylaws
|Lowers personal tax rate
|Separates control from ownership
|Enables you to raise capital more easily
|The process of incorporation is long and detailed
|Perpetual existence of your business
As you can see, there’s a lot to think about when considering incorporating your business and a lot of new information to digest.
It’s a big decision, and you’ve done well to cover the basics before making any big moves!
Overall, the value of incorporating really depends on what you want from your business and how you want to run it.
There are plenty of great incorporation services out there that can help you navigate the process.
Why should I incorporate my business?
You should incorporate your business if you want to protect your personal assets from business liability, raise capital and expand, and change your tax arrangement to lessen your personal taxes.
What is the difference between an LLC and a corporation?
Both LLC and Inc. provide the separation of business from its owners, but an incorporated business has shareholders as owners, whereas an LLC still has a single or multiple full owners of the business.
How does incorporation work?
Incorporation works by creating a separate legal entity for your business, meaning that no one person is responsible for it in a legal sense.
It separates ownership from control and creates a distinct management structure that must be followed.
Are all corporations “Inc.”?
Yes, every corporation is legally registered as “business Inc.”. However, you are not required to use “Inc.” in your branding or your public-facing name – it’s simply a matter of legal record.