What Does It Mean to Incorporate a Business?

Deciding how to legally structure your business is an important decision, but it can be confusing trying to figure out what business type will be best for your company. There are several different kinds of corporations, including C-corps, S-corps, and LLCs. And if you’ve never owned a company before, you’ve probably wondered, “What does it mean to incorporate a business?” 

While it depends on where your business is located, incorporating usually means restructuring a business so that it becomes its legal entity. So whether you want to keep working where you are now or you want to do business in Hong Kong, incorporation could make it easier.

Let’s dive more deeply into incorporation and why it’s an important step for many businesses to grow. 

How It Works and Why It’s Important

Most people are familiar with the term “incorporation,” but they may not know exactly what it means and why it matters to business owners. Many businesses are started as sole proprietorships or partnerships, two types of businesses that are owned and run by one or more people who accept liability for the business. 

These kinds of businesses are seen as a legal extension of the people who own them. This means that the owner or partners have control over the business and assume the liabilities and benefits of ownership. 

For many successful SMEs, this setup works perfectly. But as a business grows, and as the owners have more at stake if their business was to run into legal trouble, incorporation allows for the business itself to assume liability that would otherwise fall on the owners. This is possible because a corporation is a separate legal entity.

Different Kinds of Corporations 

Not all corporations are the same. While they are all distinct legal entities, the laws and regulations under which they operate vary depending on the type. The corporation types listed below are commonly found in many places around the world, including the United States. 

C Corporations (C-Corps) 

A C-corp is one of the most common kinds of corporations. C-corps have no limits on ownership, which means this type of corporation can sell as many shares in the company as it wants. Businesses that want to raise capital as they need it tend to choose a C-corp because they can sell more stock to raise more money. 

Below are a few of the many instances when choosing to incorporate as a C-corp would be a good idea:

• You want to limit your personal liability.
• You want your business to continue after your death.
• You want to reduce your risk of being audited.

S Corporations (S-Corps)

An S-corp has one big advantage over a C-corp in that it bypasses the double taxation that occurs when a C-corporation pays a dividend. The owners of an S-corp also enjoy limited personal liability, and they can claim losses from the business as deductions on their tax filings. 

Here are a few reasons an S-corp might be the right choice for your company:

• You need to reduce personal liability.
• You want to be able to claim costs as losses on your personal income tax.

Limited Liability Corporations (LLCs)

An LLC is another type of corporation that provides liability protections for the owners. This can be especially helpful when a business owner needs extra protection that may not be covered by the commercial liability insurance you carry as a sole proprietor. 

Below are some reasons an LLC might be a good choice:

• You want to reduce your personal liability as an owner.
• You prefer having flexibility in the way the company is managed.
• You want more freedom to have different ownership classes and the way profits are shared with those classes.

Nonprofit Corporations

A nonprofit corporation adds a level of legitimacy to a nonprofit venture while simultaneously protecting your individual assets. Nonprofit corporations are eligible to apply for and receive public and private grants. Some nonprofits may also qualify for tax-exempt status and donations from individuals are tax-deductible.  

Incorporating a nonprofit is a good idea if:

• You need to protect your individual assets.
• You are seeking tax-exempt status for the organization.
• Grants and donations will make up the bulk of your funding.

How To Incorporate a Business

Every country, as well as most states, provinces, and principalities, has different requirements for incorporating a business. To make sure your incorporation goes as smoothly as possible, make sure to speak with an attorney or another expert to ensure you’re following all the laws in the place where you’re incorporating.

Decide Where You Will Incorporate

Determining the best place to incorporate can take some time. Certain locations have lower incorporation costs and fewer restrictions on how a corporation is organized or run. Some areas may have lower taxes than others. 

In some countries, you can incorporate in a state or province you don’t operate in to help you keep your costs lower. If you are trying to grow your business internationally, you might need to incorporate it in more than one country.

Choose Your Type of Corporation

After you’ve decided where you will incorporate, it’s time to decide which type of corporation you’ll create. Each type has its own advantages and disadvantages, so make sure to speak with experts who can help you determine which is best for your unique situation. 

Create a Unique Name for Your Corporation

Choosing a unique name for your corporation can be more difficult than you might think. The name has to be unique because of trademarks and for tax purposes. However, your corporate name doesn’t have to be the same name you run your business under. A DBA (Doing Business As) lets you run your business under its name even if the corporation that owns or operates it is different.

Choose a Registered Agent 

Corporations can’t accept legal documents on their own, so you’ll need to designate a registered agent who will act on behalf of the company when documents need to be delivered or served.

For many smaller corporations, one of the board members or a director within the company usually takes on this responsibility. Check local laws to ensure the registered agent meets all residency requirements.

Create Articles of Incorporation and File Them

Articles of incorporation are the documents a company is required to file with a government agency to become a corporation. The requirements for these documents vary based on the type of corporation and the location of incorporation.

Usually, you will be required to include:

• The corporation’s name
• Name and address of the registered agent
• The legal structure of your corporation (LLC, S-corp, etc.)
• Information about your company’s board of directors (names and addresses)
• Number of shares authorized by your business 
• The length of time the business will remain open (if it isn’t supposed to be perpetual)

Requirements for articles of incorporation are then filed with the appropriate governing body. These articles and some structural documents you create (including organizational charts) may be needed to open corporate bank accounts in some countries. 

Hold Board Meetings and Complete Other Requirements

Depending on the legal structure of your corporation, you may be required to hold board meetings to formally accept corporate bylaws and issue stocks. It’s also important to create a system to ensure all laws and regulations are being followed and that the proper tax requirements are fulfilled.

Pros and Cons of Incorporating a Business

There are benefits and drawbacks to opening a business of any kind, but with a corporation, those pros and cons can get a little confusing. Let’s shed light on some of the main benefits and disadvantages of turning your business into a corporation.

Now that you have a deeper understanding of the question, “what does it mean to incorporate a business?” you might want to spend some time learning more about the advantages and protections a corporation offers over other legal structures. Being incorporated could open new doors in terms of financing and expanding into new markets, like China, too.