Your business is attracting public interest and the interest of investors. If so, it might be time to consider incorporation. There are benefits to incorporating your business that make this business structure an attractive option to many.
What is a corporation?
A corporation is a way to structure your business. Generally, corporations offer shares in the company either privately or to the public, and the shareholders are considered the owners of the corporation. Corporations are run by a board of directors.
Corporations must execute “articles of incorporation.” This document describes the purpose of the corporation, identifies the state where the corporation is located and states how many shares in the corporation will be made available. Corporations are registered with the state, per state statutes, and there are filing requirements as well.
Advantages of incorporation
Corporations give many people the opportunity to own a part of the business. Moreover, a corporation is a separate entity from its owners for legal purposes. This division offers several advantages to its owners and board members.
One advantage to incorporation is that it attracts those who want to invest money in your company. When you offer shares in the corporation, it allows members of the public and investors to own part of the company. If they think the company will be financially successful, they will want to share in this success in the form of dividends.
Another advantage to incorporation involves legal liability. The board of directors must act in the best interests of the corporation. However, absent director misconduct, the directors of a corporation and its shareholders are not personally liable for the actions of the corporation. For example, if the corporation is sued or files for bankruptcy, this will not affect the director’s or shareholder’s personal pocketbooks, except in the form of lost dividends.
A third advantage to incorporation is that it makes it easy to sell only a part of the business, rather than having to sell the entire business. So, the founders of the business might sell part of it for their own profit while keeping their ownership interest in the enterprise.
Corporations are an attractive business structure, but they are not for everyone. A corporation must follow its bylaws and state reporting requirements, which can be expensive. Corporations might also be subject to double taxation. Still, the financial and liability advantages to incorporation might make it worthwhile to some.