Incorporation Basics
Starting a business as a sole proprietor, or operating a partnership is the easiest ways to have a business entity. Corporations and LLCs are more work and cost more money to form - so why incorporate. Let's assume Phil Thow is interested in forming a corporation.
For example, when Phil Thow's corporation enters into a contract, the corporation is responsible not the shareholders, this is one of the main advantages of incorporation, the limited liability that it affords the company's shareholders. Banks may require a personal guaranty for a new company that does not yet have a credit history; the benefit of incorporation is that creditors have no right to money or property that is not an asset of the company, under usual circumstances. This also holds true if litigation ensues, the corporate entity will be sued, not the owner, in cases that are absent undercapitalization that is fraudulent.
Double taxation is a huge disadvantage to incorporation, so are the added responsibilities of statutory regulations and record keeping. Double taxation is the taxing of the company's profits and the additional taxing of the dividends from the net profits. Phil Thow's company can avoid double taxation by using a LLC or by forming an S Corporation. Companies can also enjoy tax-free benefits such as health and life insurance and various retirement plans. Professional tax and/or legal advice should definitely be sought on these intricate tax matters.
If you determine that incorporation is right for your business, there are many things to consider, including: company name, which state to incorporate in, and trademark availability.
The following is a list of documents that must be completed accurately and completely for your corporation; more documents may be necessary for your particular state and or business:
- Certificate of Incorporation/Articles of Incorporation
- Bylaws for your Company
- Resolutions for your Company
- Resolutions of the Board of Directors
- Stockholder Resolutions
- Stock Ledger
- Stock Certificates
After the certificate of incorporation and all necessary documents are filed with the secretary of state in the state you choose to incorporate in, Phil Thow's corporation becomes official. Since the introduction of the most recent Corporation Act, the process of incorporation is now less complicated. Today, there are many companies on the internet that assist you in the incorporation process. It is always very important to seek professional taxation and legal advice before selecting an online company.
Legal Rights of a Corporation
The law grants any corporation to exists as a legal person with a special legal framework that can purchase properties, sign contracts, buy shares, and sue and be sued during the course of the operation. The corporation like any other person also pays taxes on its own and separate from its members or shareholders. Any corporation has the legal right by state law to exist as a moral or legal person distinct from its members or shareholders. The registration process lets the corporation gain the advantage of operating as a legal person with basic rights to negotiate, perform business, and apply for financing that is separate from the shareholders.
A corporation legal framework creates a separate legal personality with unique economic implications. The corporation distributes the corporate assets first to the creditors in case of bankruptcy or liquidation. The corporation’s top priority upon liquidation is the creditors followed by list of account payables, and then the shareholders, if there is anything left from the liquidated assets for the shareholders to share. The stockholders do not have any right to withdraw corporate assets since their powers are limited to the voting authority they gain from the amount of shares they purchased from the corporation. This also implies that creditors cannot claim over the personal assets of the shareholders except for the limited liability as shown with their amount of shares contributed to the organization. Creditors attempting to claim more than the limited liability of shareholders need special legislation to continue with the claim process.
Below are some state regulations that favor incorporations:
The corporation's shareholders limited liability
Shareholders of a corporation enjoy limited liability, which means that creditors can only claim against the personal assets of the shareholder, the shares of stocks owned in the corporation, up to the amount of shares owned. This implies that shareholders responsibility to the corporation is only limited to the amount of stocks or number of shares they purchased. Any shareholders potential losses in case of liquidation of corporate assets is only limited to their paid number of shares. Limited liability also implies that shareholders do not have any right to control the operations or trading activities of the corporation. The corporation as a legal person has every right to perform its own trading activities without shareholders interference. This also prevents the shareholders to insist on selling shares that would at least equate the seller’s credit worthiness.
One good aspect of gaining the legal rights of limited liability is that it allows the corporate body to combine funds obtained from shares to finance potential projects which has every possibility to increase the number of shareholders while decreasing the amount of risk a shareholder may suffer in case of any occurrence of unlikely business operations. In other specific area of jurisdiction like the two provinces in Canada and in the United Kingdom, they allow applications for corporation unlimited liability.
Control and ownership context of various types of corporations
Corporations created for profit consists of persons and other business organizations that purchased number of shares of stocks to gain voting power, rights, or authority over the corporation’s activities called as shareholders. Corporations that do not sell shares of stock referred as non-stock corporations have their own members to vote identified as the “Trustee”, “Associate”, “Honorary”, or “Active” in their Articles of Incorporation. The Articles of Incorporation as well as the By Laws may refer to the corporation as the “Corporation” or corporate distinctive name of “The ABC Club, Inc.”. The “ABC Club, Inc.” represents the corporation’s name with the legal ending and descriptive element in it that serves as another name of the “Corporation” and may interchangeably used as needed within the Articles of Incorporation and By Laws. In a non-stock or not-for-profit corporation, the owners continue to enjoy special corporation legal privileges such as limited liability than those that do not have an incorporation status as such as the associations and other individual ordinary businesses.
The first step to incorporation is the preparation and filing of the Articles of Incorporation to a designated government agency. The Articles of Incorporation will specify the corporation’s general nature as such as the number of stocks that a corporation may issue as well as the list of the directors or officers of the corporation complete with their addresses and number of shares or amount of shares owned. After the approval of the Articles of Incorporation, the directors will then prepare the By Laws that will govern the corporations’ officers’ duties and responsibilities. The By Laws include the methods, policies, and other procedures that relate to shareholders’ meetings and corporation’s internal functions.
Disclosing Corporate Financial Statements
Most states require corporations to publish the audited financial information yearly to inform the public especially the existing and potential creditors about the health and liquidity of the corporation. The shareholders benefiting from the limited liability need to sacrifice personal information or little privacy for the limited liability because creditors extending financing to the corporation need some data and tools to assess the organization’s credit worthiness. Europe is very keen on this requirement. The United States only requires publicly traded organizations to disclose financial statements for the protection and information of their existing investors.
Incorporations
It is important for business owners to know that will not be held personally responsible for the actions or financial obligations of the business, unless they are protected by an incorporation or LLC
If anything ever goes wrong, like getting sued by a disgruntled customer, or falling behind in payments to creditors, you are the only one responsible, and that can be terrifying.
Nevada is well known for its unflinching stance on how important it is to protect the rights of all business owners that operate or incorporate within its borders. Nevada has demonstrated this belief by passing into law some of the most forceful privacy legislation and asset protection in the entire country.
For businesses that choose to incorporate in Nevada, there are many reduced requirements for operation, like the fact that stockholders, officers, and of the corporation don’t actually need to live or even hold their meetings in Nevada, nor are they even required to be U.S. Citizens.
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