Many corporations are household names, and perhaps you dream of having your business included in the realm of these popular entities. There are good reasons to incorporate, but before jumping headfirst into incorporation you should understand what a corporation is so you can recognize whether you are truly ready to incorporate your business.
What is a corporation?
A corporation is a business entity that is owned by shareholders who buy a piece of the business via shares (also referred to as stocks). These shares can be sold, inherited or otherwise quickly and easily transferred.
Corporations are managed by a board of directors and run by officers. A corporation will continue existing and running, even if an officer or shareholder passes away, leaves the business or transfers their shares.
A corporation is its own “person.” It is a completely separate entity from its owners. This separation means the corporation, not its owners, directors or officers can:
- Purchase and own the business assets
- Enter business contracts
- Take out and pay back business debts
- Go bankrupt, and
- Be sued if a business dispute arises
The owners, directors and officers of the corporation are protected by the “corporate veil” against the debts, obligations and actions of the corporation. The directors’ and officers’ personal finances will not be touched should the corporation purchase assets, be sued or go bankrupt. The corporate veil generally can only be “pierced” if the directors or officers breach their fiduciary duties or otherwise commit wrongdoing.
To create a corporation, articles of incorporation need to be filed with the state. Corporations also need bylaws. The corporation must be registered with the state and follow the state rules of incorporation, or else the corporate veil will be pierced.
Signs you are ready to incorporate
One sign you might be ready to incorporate is that your business is attracting the attention of investors. Having investors purchase shares of your business can greatly increase the value of your business and allows you to expand the reach of your operations.
Another sign you might be ready to incorporate is if you know you do not want to risk losing your personal assets if your business is sued, cannot pay its debts or goes bankrupt. Other types of business structures, such as sole proprietorships and partnerships, do not have the protection of the corporate veil.
A third sign you might be ready to incorporate is if you want your business to run without too much involvement by you personally. Incorporations are managed by a board and run by officers, meaning you can step away from the day-to-day operations of the business.
A fourth sign you might be ready to incorporate is if you want to avoid having your business operations disrupted or even having your business close its doors just because you or a partner leave the business or pass away. It can be complicated to unwind a partnership or otherwise transfer ownership should a partner leave the business, and a sole proprietorship could close its doors altogether if you pass away or retire and cannot sell the business or transfer ownership to someone else.
Corporations are an attractive business structure but do not jump into one right away. You must take the time to develop one according to state law and register it, which can take time and money. It is not the simplest business structure, so if you are interested in incorporating you will want to make sure you understand all legal requirements for opening, owning and operating one of these businesses.