Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, a sports club, or a government of a new city or town. Even though corporations are not people, they are recognized by the law to have rights and responsibilities like natural persons under the law. The articles of incorporation (also called a charter, certificate of incorporation or letters patent) are filed with the appropriate state office, listing the purpose of the corporation, its principal place of business and the number and type of shares of stock. A registration fee is due, which is usually between $25 and $1,000 depending on the state.
Usually, there are also corporate bylaws which must be filed with the state. Bylaws outline a number of important administrative details such as when annual shareholder meetings will be held, who can vote, and the manner in which shareholders will be notified if there is a need for an additional "special" meeting.
A corporation has a distinct name and it is generally made up of three parts: "distinctive element," "descriptive element," and a legal ending. All corporations must have a distinctive element, and in most filing jurisdictions, a legal ending to their names. Some corporations choose not to have a descriptive element. In the name "Tiger Computers, Inc.", the word "Tiger" is the distinctive element; the word "Computers" is the descriptive element; and the "Inc." is the legal ending. The legal ending indicates that it is, in fact, a legal corporation and not just a business registration or partnership. Incorporated, limited, and corporation, or their respective abbreviations (Inc., Ltd., Corp. ) are the possible legal endings in the U.S.
Legal Benefits
- Protection of personal assets: One of the most important legal benefits is the safeguarding of personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the liabilities of a business such as loans, accounts payable, and legal judgments. In a corporation, however, stockholders, directors and officers typically are not liable for the company's debts and obligations. They are limited in liability to the amount they have invested in the corporation. For example, if a shareholder purchased $100 in stock, no more than $100 can be lost. Corporations and limited liability companies (LLCs) may hold assets such as real estate, cars or boats. If a shareholder of a corporation is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of a shareholder of a corporation or LLC cannot seize the assets of the company. However, the creditor can seize ownership shares in the corporation, as they are considered a personal asset .
- Transferable ownership: Ownership in a corporation or LLC is easily transferable to others, either in whole or in part. Some state laws are particularly corporate-friendly. For example, the transfer of ownership in a corporation incorporated in Delaware is not required to be filed or recorded.
- Retirement funds: Retirement funds and qualified retirements plans, such as a 401(k), may be established more easily.
- Taxation: In the United States, corporations are taxed at a lower rate than individuals are. Also, they can own shares in other corporations and receive corporate dividends 80 percent tax-free. There are no limits on the amount of losses a corporation may carry forward to subsequent tax years. A sole proprietorship, on the other hand, cannot claim a capital loss greater than $3,000 unless the owner has offsetting capital gains.
- Raising funds through sale of stock: A corporation can easily raise capital from investors through the sale of stock.
- Durability: A corporation is capable of continuing indefinitely. Its existence is not affected by the death of shareholders, directors, or officers of the corporation.
- Credit rating: Regardless of an owner's personal credit scores, a corporation can acquire its own credit rating, and build a separate credit history by applying for and using corporate credit.