Incorporation in Law Terms: Everything You Need to Know
Incorporation in law terms means that a business or company has decided to form as a corporation which is seen as a separate legal entity.3 min read
Incorporation in law terms means that a business or company has decided to form as a corporation which is seen as a separate legal entity. By forming as a corporation, the business can pay taxes, initiate litigation, and can be sued by others, just like a person. The process of incorporation requires the following steps:
- Select a unique name that is not in use by another business entity, or that could be confused with another business entity.
- Prepare the articles of incorporation.
- Select a registered agent.
- Choose a stock structure.
- Adopt a set of bylaws.
- File the articles of incorporation with the Secretary of State, or the correct state agency.
- Hold the first meeting to launch the corporation.
Additional steps should be taken that are set in place by the Securities and Exchange Commission or the State Corporations Commissioner. If the corporation intends to be a nonprofit, the corporation must apply with the state and with the Internal Revenue Service to gain federal nonprofit status.
Benefits of Incorporation
By incorporating, the owners receive several benefits. The main benefit is that the business is viewed as a separate entity from the owners. Additional benefits include:
- Personal asset protection.
- Ability to transfer ownership.
- Taxation benefits.
- Ability to sell stocks.
- Create retirement plans.
Personal asset protection means that the owners and/or shareholders are only liable for the amount they invested in the corporation. This means if the corporation is sued or has outstanding debt obligations the owners and shareholders are not financially liable, and all of their personal assets are protected.
Taxation benefits include corporations being taxed at lower rates than individuals. Also, corporations are allowed to own stock of other corporations. Any corporate dividends are 80 percent tax-free.