What is Incorporation?
1. Incorporation refers to the forming of a new corporation. It is a legal and financial maneuver that forms a corporation or a legal entity that is recognized as a profit or not-for-profit based organization. The end product of incorporation may be a business, a government entity (such as a new town or city) or seemingly any formal organization that is legally recognized as a “normal person.”
2. Incorporation is held separate from a ‘corporation’ in that incorporation refers to the process that is required to form a new organization or entity. The term ‘incorporation’ is thus distinct, meaning it is the process required to create an entity. However, the end result of the process is somewhat broad. As stated before, incorporation can result in a wide array of organizations or entities.
Legal Aspects for Incorporation
1. Incorporation effectively protects a person’s assets. When an entity is created through incorporation, all personal assets against legal claims of creditors or lawsuits are safeguarded. This characteristic is held separate from the formation of sole proprietorships and general partners—the members of these entities are either personally or jointly responsible for all liabilities that a business may incur. In a corporation, however, the directors, officers, employees, and stockholders are not liable for all debts or obligations incurred from the business model. These individuals are only responsible for the personal amount invested in the corporation; the amount of stock or their employment is held liable for the company’s potential insolvency.
2. All byproducts that result from incorporation are easily transferable. The ownership in a corporation or a Limited Liability Corporation is easily transferable to consumers or investors. This characteristic is an effective way to spread risk and raise capital through investment.
3. When a corporation is formed through incorporation, the entity is awarded numerous tax benefits. According to the corporate law of the United States, all corporations are taxed at lower rates than individual consumers. Furthermore, a corporation (formed through incorporation) may own shares in other corporations and benefit from corporate dividends, which are 80% tax-free. A corporation faces no limit in regards to the amount of losses they may carry to subsequent tax years. This taxation model is held separate from other forms of businesses, such as a sole proprietorship, where the entity is only permitted to claim a capital loss that exceeds $3,000.
4. Any corporation created through incorporation may raise capital through the issuance of stock. When investors purchase the corporation’s stock, they do so in exchange for a monetary investment. This characteristic also offers the corporation great durability. If a shareholder dies, the corporation continues to function as a result of the transferability of shares.
5. All corporations created through incorporation possess their own unique credit rating. The credit histories of the corporation’s Board of Directors are held separate from the entity’s credit report.