By incorporating your business as a company, you are making your business a separate entity that can hold assets and incur liabilities in its own name. This means limiting your business liabilities.
This page comes under the section Small Business Management.
You can do business as a sole proprietor, in partnership with other people or create a corporation that is legally a separate entity from its owners. This new entity can execute contracts in its own name, and normally the contract binds only the corporation and the other party to the contract. The stockholders of the corporation (the owners) are not personally liable unless they have provided a guarantee or done something wrong.
The result is that if the business becomes bankrupt, business creditors can proceed only against the corporation's assets, and not against the stockholders. Stockholders are liable only to the extent of any unpaid amounts against the stock they have agreed to take up. This is a very different scenario compared to sole proprietorships and partnerships. In these non-corporate businesses, the personal assets of the owners can be attached to pay the creditors.
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So how do you go about doing business as a corporation, and what are the other implications?
A corporation has greater credibility among suppliers, bankers and customers. Suppliers and bankers would prefer to deal with a registered entity they can investigate compared to an unknown individual, or a partnership of unknown individuals. Registering a corporation involves making some or a lot of information about the owners and the corporation publicly available.
Registering a corporation also creates an impression that the business is a serious endeavor and not a fly-by-night operation. Suppliers, bankers and even customers are hence more likely to be willing to do business with the corporation. With a well executed brand-building exercise, the corporation can enhance its respectability and trustworthiness.
You have to pay a price for the limitation of liability and the greater respectability, in the form of a lot of formalities to register your corporation. Creating a corporation generally involves the following steps:
There are different types of corporations. These types vary from country to country. In the US, for example, there is the C Corporation, S Corporation, LLC, Professional Services Corporation and Non Profit Corporation. The types differ in the formalities they have to comply with, the taxes they have to pay and the kinds of activities they can engage in.
Corporations have to maintain accounts as stipulated in the corporation laws and rules. These accounts are audited by independent auditors, who are required to state whether the accounts portray a true and fair view of the company's results and affairs. In the case of public corporations, the audited accounts are available to the public at the Corporation or Companies Office.
As you can imagine, the costs of registering, and then complying with recurring formalities, are much more for corporations than for other forms of business. There is also the issue of loss of varying amounts of privacy.
Corporations are independent legal entities, and are taxed on their income and turnover. Additionally, if the corporations pay dividends to their stockholders, the dividends can be included in the total income of the recipient and taxed at rates applicable to that person.
You might need to do some complicated calculations to determine whether your tax liability would be higher or lower if you do business by incorporating a company.
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If you’re a business owner, incorporation can help you protect your personal assets and cut down your tax bill. But all the paperwork and legalese can make incorporation seem like more trouble than it’s worth. Incorporating Your Business For Dummies offers all the savvy tips you need to get incorporated — starting today!
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