If you run a small business but want to develop your company into a serious enterprise, you should consider the process of incorporation.
While incorporation involves a whole new aspect of accounting and tax preparation, as well as an application process, there are innumerable benefits to incorporating a small business.
What is Incorporation?
Incorporation, often abbreviated as “inc.” in the United States and Canada, is the legal process of forming a legal entity, or corporation, which is then recognized by law. This process then separates a company’s assets and income from those of the owners and investors.
How To Incorporate a Business
To incorporate your business, use the following steps:
Choose a name for your corporation
Be sure to choose something distinctive and not misleading. You can use the NUANS® Search System to compare your proposed corporate name with databases of existing corporate names. This comparison determines any similarities that may exist between your chosen name and existing names.
Complete the articles of incorporation
The articles of incorporation establish the structure of the corporation. This form needs to be signed by an incorporator. Incorporators are typically the owners of the business but can also be members of the law firm handling the incorporation process.
Establish an initial office address
This is the address in which all of the corporation’s records and documents will be located. The board of directors should also be established and their addresses provided in application as well.
File the proper forms
The proper forms must be filed and the necessary fee paid. There are two forms which are necessary to incorporate: Form 1 (Articles of Incorporation) and Form 2 (Initial Registered Office Address and First Board of Directors). Other forms may be necessary depending on the situation – you can find them here.
Wait for the application to be processed
If the application is incomplete, it will be returned with an explanation as to why it was invalid. A completed form may also be returned if there is pertinent information missing.
Otherwise, a completed and accepted application will be processed and the applicant will be notified of its success.
The Benefits of Incorporating a Business
While incorporation may seem like a lengthy and complicated process, there are significant benefits to incorporating your business.
Here are a few advantages to incorporating your business:
Protect the Owners and Investors Assets from Company Liabilities
Corporation owners exists separately as individuals from the company entity. Any debts or liabilities held against the company do not personally affect the owners and investors.
This means that personal assets, such as houses and cars, cannot be seized in relation to the company’s debts and responsibilities.
That being said, a corporation can own property which is not protected against liabilities.
Allows Company to Raise Capital Through Stock
When you incorporate a business, you have more opportunities to raise money in order to grow and develop your company. Corporations can incur debt but they can also raise money by selling shares.
This is known as “equity financing” and is highly beneficial to companies since it does not have to be repaid and incurs no interest.
The only caveat is that issuing shares reduces your percentage of ownership in the company.
Corporations Have Unlimited Life Spans
As owners and shareholders pass away or move on, their shares are transferred to their heirs or sold. This means that as those in charge of the business are no longer involved, the corporation itself passes on through inheritance or sale.
Incorporating Makes a Business Credible
Incorporation provides credibility to a business by projecting a serious nature to potential investors, lenders, suppliers, customers and employees. It distinguishes a company as one that is long-lasting and committed to continuing into the future.
Take Your Business to the Next Level
Our professional accountants at Liu & Associates can help you navigate the process of reorganizing your accounts and taxes if you decide to incorporate your small business.