What is Incorporation?
Incorporation refers to the process of turning a business or entity into a new corporation. Once finalized, incorporation allows the prospective business to be considered and recognized by law as a corporation. However, incorporation is not just limited to businesses, sports teams (or clubs), governments, non-profit organizations, and even newly formed cities and/or towns can be incorporated.
In order to incorporate a business or company, there are certain steps to follow. This process—and the laws that surround the process—will vary from state to state. The multifarious laws for incorporation, which can be found in a particular state’s Articles of Incorporation, must be complied with to legally incorporate an entity.
The Articles of Incorporation will include the purpose or reason to incorporate, the location of the business, and the amount of outstanding stock at the time the application for incorporation is submitted to the state. Although the incorporation process varies from state to state, guidelines and surrounding regulations are somewhat uniform. Moreover, all states in the U.S. allow for online registration; an individual may incorporate an entity by accessing their state’s “On-line Business Filing and Registration Service” website. Listed below is the incorporation process for New Jersey:
A state’s online service will enable you to file new corporations, limited partnerships, limited liability companies, as well as, allow you to obtain authorizations for foreign businesses to conduct operations in the state. Furthermore, you may also register any business for employer contributions for unemployment and disability, taxes, and to obtain temporary certificates of authority for sales taxes.
The first process required for incorporation is to choose the type of business entity you wish to incorporate—your state’s site will provide a drop-down menu that lists all entities eligible for incorporation (choose the formation that applies). Note: the choice of entity type and the effective filing date will have significant employer/tax implications. As a result, it is recommended that you consult with an attorney and/or a tax professional for guidance on said matters.
After you select the entity type, you must enter the proposed name of your business at this point. The corporate name is comprised of three parts: a distinctive element, a descriptive element and a legal ending. The descriptive element is the name that separates your company from other entities; the descriptive element (not required) is the industry your business operates out of (i.e. Computers, Electronics, etc.) and the legal ending indicates the formation of the business (i.e. Corp., Inc., Ltd.).
When you list the name, click ‘enter’ and then list the appropriate business designator, for example, corporation, incorporation, partnership etc. Once this is satisfied, you will be taken to the application, which will require the following information:
• Your Employer ID number
• The purpose of your business
• Your NAICS code
• The duration and total number of shares outstanding
• Information concerning a Registered Agent
• List the names and addresses for all Incorporators
• The date of the application (the effective date for Incorporation purposes)
Once this information is recorded, you must sign the filing, pay the filing fee and confirm your wish to desire the said entity.
Legal Benefits Attached to Incorporation:
Retirement Funds: When an entity is incorporated, retirement funds and plans may be established more easily.
Credit Ratings: Regardless of the owner’s personal credit score, a corporation can obtain its own credit rating and thus build a separate credit profile by applying for and using corporate loans, financing or credit.
Ability to Raise Funds: Corporations can raise capital from investors through the issuance and sale of stock.
Taxation Benefits: Corporations, in the United States, are taxed at lower rates than individuals. Moreover, a corporation can own stock in other corporations and obtain corporate dividends, which are 80% tax-free.
Protection of Personal Assets: Corporations present the ability to safeguard personal assets against the claims of lawsuits and creditors. Other formations, such as sole proprietors and general partners, are responsible for the liabilities of the business. However, with a corporation, the shareholders, directors and officers are not liable for the entity’s obligations/debts—these individuals are limited in liability to the amount they originally invested in the corporation.