Small Business

Understanding The Process Of Incorporation

You can do business as sole proprietor, in partnership with others or by organizing a separate business entity – the corporation or company. Company incorporation, the last option above, is the topic of this essay.

A corporation or company is a distinct entity separate from its shareholders or owners. Just like an individual, it can own property and enter into contracts. Its assets and liabilities are its own and the company owners cannot be held liable to pay its debts. (If one or more owners have given a personal guarantee, however, personal liability would also arise.)

Generally, shareholders are liable only to the extent of any unpaid amount on the shares they have agreed to take up. If a company becomes insolvent, shareholders are liable only for these unpaid dues.

In addition to limited liability for business debts, the company form also imparts greater respectability. A corporation would find it easier to raise capital and other forms of finance. Lenders and investors can examine the company’s previous performance record by examining the publshed accounts of the company.

These accounts need to be audited by an independent auditor and must be filed with the Companies Office. Outsiders cam access the filed accounts at the Companies Office.

The limited liability, better image and ease of raising finance come at a price. These take the forms of:

  • Higher costs of formation
  • Recurring costs for complying with formalities
  • Numerous formalities
  • Some loss of privacy
  • Possibly higher tax burden

Corporations have to pay tax on their income. In addition, shareholders might have to pay tax on the dividends received by them.

Creating a corporation generally involves the following steps:

  • Check availability of the proposed name. No other corporation under the same jurisdiction (country or state) must have already registered with that name.
  • Create a document called Articles of Association (and Memorandum of Association in some countries). These documents set out the objects for which the corporation is being created, its powers and the way it will be administered.
  • File the documents with the Corporation or Companies Office of your country (or state). The documents must be signed by a minimum number of promoter shareholders. This minimum might vary with the type of the corporation.
  • Pay the required fees. The amount of fees usually depends on the size of the corporation, as evidenced by the proposed share capital the corporation can raise (as indicated in the Articles or Memorandum of Association).

There are different types of corporations. These types vary from country to country. In the US, for example, there is the C Corporation, S Corporation, LLC, Professional Services Corporation and Non Profit Corporation.

The types differ in the formalities they have to comply with, the taxes they have to pay and the kinds of activities they can engage in.

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