All about business incorporation
In this guide to incorporating your business, you will learn the benefits of of transferring risks from one business form to the other. The corporation is regarded to be a legal entity which is artificially created and exists separately from its creators and carries on its day to day operations.
It is possible to form a corporation by a single incorporator by filing for charter application with the desired state. The incorporator, by fling this application is able to place on records, the facts like:
- Purpose of the corporation
- Incorporator name & addresses
- Capital stock type and amount that will be authorized to the corporation to issue.
- Privilege and rights given to holders of every stock class
Why to incorporate?
In certain situations, operating as corporation does come with its own drawbacks. It is the business owner who is held responsible to ensure record keeping and administrative details. It is something that not desired by the entrepreneur during the early operation stages. Besides tax reasons, the reason for incurring corporation setting up cost is due to the fact that shareholders are not liable legally for the corporation taken actions, as the latter has its own existence from those running it.
The benefits of incorporating a company
- Personal liability related issues arising from company obligations and debts do not affect owners.
- For public companies, corporations are considered to be the best vehicle.
- Corporations do have reliable legal precedent body to provide guidance to managers and owners.
- Ownership can be transferred easily by corporations through security transfers.
- Capital can be raised easily by corporations through securities sale.
- Under certain circumstances tax benefits are allowed for corporations. However, ‘double taxation’ might be subjected upon C corporations, on profits. Hence under Internal Code’s subchapter S, several entrepreneurs do prefer to operate corporations. This entity also termed as S corporation allows passage of income to individual shareholders.
- Corporations are allowed to enjoy unlimited life.
Type of business structure
Setting up a new venture does require to take different types of decisions. It is necessary to take into consideration several aspects like business plan, name, location, measurable objectives and how to structure the business.
Businesses can be established in four ways, which are given below:
- LLC (Limited Liability Company): With limited liability, such businesses are also owned by several other entities like trusts, individuals, other corporations and LLCs. If established following proper guidelines, they are taxed similar to partnership, thereby providing an advantage.
- Corporation: It is quite a flexible setup and is state chartered, coming with several legal rights. Since it has different legal standing, the owners enjoy limited liability, which means, if the business is sued, they do not have to face personal legal action.
- Partnership: When a written agreement is formed by two or more people to operate the business. it is also possible to establish partnerships between other businesses as well as among a single or more individuals or businesses. It is an inexpensive and simple method, but comes with its own liability and tax issues. However, when trying to raise capital, there are shared responsibilities to be borne, including managing operations and taking crucial decisions. But conflicts arise, irrespective of its nature and size, unresolved disputes are likely to endanger the business.
- Sole proprietorship: It is a single owned business entity, allowing the owner to use any name to do business. also, there are minimal requirements, like necessary licenses, permits and social security number. It is often the favorite choice among many as it is really economical. The benefits derived are that there is just a one-time tax unlike that of the company after which the entrepreneur can enjoy personal revenue. Also, there is not much taxation or government involvement.
All the four business entities do have some slight differences in them which govern their operation and creation and are found to vary from one state to the other.
Why some companies incorporate in Delaware?
A good number of companies prefer to form an LLC or incorporate a business in Delaware state. Over half of the Fortune 500 and public companies are to be found in this state. The main reason for the same is to due to attractive tax advantages that businesses enjoy here. Some of the advantages offered for large businesses are:
- Delaware Chancery Court focuses mainly upon business law. Judges are used instead of juries.
- The state’s business law is considered to be among the most flexible throughout the country.
- For companies having complex capitalization structures including authorized stock shares in large numbers, taxation requirements are found favorable.
- No corporate income tax is mandated by state for companies which although formed here, do not carry out any transaction. However, there is franchise tax.
- LLC managers/members or corporation officers, directors and shareholders need not be residents of the state.
- Non-residents do not have to file any personal income tax.
- People from outside the state owning stock shares do not have to pay any state taxes.
The court system, typically, is not considered to be the main factor when trying to select the right place to set up business. however, in this regard, Delaware does require special mention. Delaware Chancery Court does offer shareholder lawsuits with an advantageous venue. Only business cases are heard and that too by judges and not by juries. This can be a huge plus point for large corporations having thousands of shareholders.
How much does it cost to incorporate my business?
When incorporating in Delaware, there are several fees that need to be taken into consideration. The fees charged by the state to incorporate a new business are a minimum amount of $89. This fee tends to include $50 towards Corporation fees, $24 towards county fee and minimum $15 towards filing fee tax. The price however, is based upon a corporation having issuing 1,500 shares at no-par value. Hence, filing fees are likely to vary, which again depends upon the share numbers that is desired and par value.