Updated on April 19th, 2023

5 Benefits: What Does it Mean to Incorporate a Business

By: Brad Nakase, Attorney

Email  |  Call 888-600-8654

Helen has spent many years of hard work getting her cosmetics business up and running. Her company “Aphrodite” sells makeup, skincare, soaps, and beauty tools. Now that she has achieved a certain level of success, Helen would like to take her business to the next level. Helen’s friend, Troy, has recommended that she consider becoming an incorporation. He tells her about the advantages of incorporating her business. It would mean that she does not have to worry about liability, and if her company faces a lawsuit, her assets are safe. Helen has a family, including a young son. She does not want to have to worry about losing her livelihood: her car, her house, her savings. Troy also explains that in a competitive market, incorporating “Aphrodite” could lend Helen’s business legitimacy and credibility. This would make vendors more likely to work with her and would attract more customers. All of this sounds great to Helen, but she is skeptical. She wonders if there are any negatives to becoming a corporation. She begins to research the advantages and disadvantages of incorporation.

What It Means to Incorporate a Business

Just as Helen suspects, there are many advantages and disadvantages of incorporating a business. For background, in order to incorporate a business, a founder must file paperwork with the state in which their business is located. There can either be a single shareholder or multiple involved in the incorporation process. Importantly, an incorporated business is legally a separate entity from its shareholders.

Benefit 1: Asset Protection

When a business becomes a corporation, shareholders in that business are granted limited liability. This means that if the corporation faces a lawsuit, the shareholders cannot be held responsible. This is a major advantage of incorporating and is the reason why many founders do so. Founder and shareholders can protect their personal assets by incorporating. If there is legal action taken against the company, they do not risk losing their assets, such as cars, homes, or personal savings. Liability protection makes a business more attractive to investors as well.

Benefit 2: Raising Capital

When a corporation needs to raise funds, it can do so by issuing more stock in the company. Incorporated businesses enjoy this exclusive ability. They can also raise capital by issuing more than one type, or class, of stock. Issuing stock allows a business to meet its obligations or expand the business if desired. It is also possible to attract talented employees by offering employee stock incentives.

Benefit 3: Continuity

Unlike other forms of businesses, a corporation has an unlimited lifespan. Even after an owner dies, his or her corporation can last long after they are gone – even centuries! This means that corporations survive changes in ownership. As a separate legal entity, a corporation lives on regardless of who the owner is at any time.

Benefit 4: Taxes

Some incorporated business pay taxes twice on the same profits. This phenomenon is called double taxation. This means that a corporation’s owners pay individuals taxes on the same profits when dividends are issued – thus, being taxed double. Corporations may also be taxed twice when selling assets. Therefore, this would be considered a potential disadvantage of incorporating.

Benefit 5: Formalities

When compared to other types of businesses, corporations tend to have more formalities and regulations. Paperwork is required to incorporate, and there are relevant fees that must be paid to become a corporation. Corporations must also hold at least one meeting annually. Meeting minutes must be recorded, and banking information must be on record. Annual reports must also be filed, and tax returns filed in a timely manner.

After doing her research, Helen decides that she would indeed like “Aphrodite” to become a corporation. As she had hoped, incorporating her business limits her liability in the event of a lawsuit. Her livelihood is thereby protected, which will be a relief. Helen is also looking forward to offering stock incentives to future employees so that she gets the best and brightest working for her company. Helen would love if “Aphrodite” became a household name cosmetics brand that lasts far beyond her own lifetime, and incorporating helps that dream become a reality. Even after she dies, “Aphrodite” will live on. The only things Helen is not so sure about are the tax burdens that corporations face and the corporate formalities that must be performed. For this, she hires a good accountant and plans to find competent directors for her company. Helen loves her business and when she incorporates it, she wants to get it right.

We want to hear your story.

2 + 0 = ?

How to transfer LLC ownership?

Two common ways to transfer LLC ownership are to conduct a partial sale to a third party or sell your entire LLC to a third party.

Why Do Companies Incorporate in Delaware?

The State of Delaware offers companies lenient tax benefits and liability protection. Also, companies that incorporate in Delaware do not have to do business in the state.

Inc vs. LLC

Incs. is short for incorporated, and LLC is short for Limited Liability Company. For Inc., where the owner elected to be an S corporation, the profit and loss are passed to its shareholders, whereas income and loss in an LLC flow through to the members.

What is an LLC and how does it work

An LLC is a business entity that protects the owners with limited liability protection. An LLC also offers pass-through taxation, which means the company’s profits and losses pass through to the owner’s personal tax level.

What Is a Disregarded Entity?

A “disregarded entity” refers to an entity with one owner and not organized as an entity such as a corporation, LLC, or partnership. For federal tax purposes, the disregarded entity and the owner, who is a natural person, are not treated separate.

Breach of Fiduciary Duty in California

A breach of fiduciary duty in California occurs when an entity or person in a trustee position fails to act in the beneficiary's best interest.

5 Easy Steps: How to Dissolve a Corporation in California

When a business owner wishes to close, or dissolve, their business, he or she must file a certificate of dissolution with the Secretary of State. This certificate of dissolution lets the Secretary of State know that the business owner is terminating his or her California corporation, effectively closing it for good. Dissolution is a process that involves a number of steps.

15 Steps: Starting an Inc in California

For the business owner, there are many benefits to creating a corporation in California. Assuming it is properly run, a corporation has the ability to shield its shareholders from debts and liabilities on the business side of matters.

11 Steps on How to Start a Corporation

A corporation is a separate legal entity which can protect its owners from business liabilities and risks. There are many benefits to starting a corporation. A business owner can save money on taxes, protect his or her own assets, attract the interest of investors, or simply enhance one’s credibility among consumers and vendors.

5 Benefits: What Does it Mean to Incorporate a Business

For background, in order to incorporate a business, a founder must file paperwork with the state in which their business is located. There can either be a single shareholder or multiple involved in the incorporation process. Importantly, an incorporated business is legally a separate entity from its shareholders.

10 Must Know: Corporation vs. Incorporation

Inc. and Corp. are abbreviations that mean the same thing. Inc. means incorporated, while Corp. means corporation. When a corporation chooses its name, it can decide between adding either one of these suffixes to its name.

7 Differences Between Inc and Corp

Inc. is the abbreviation for incorporation, while Corp. is the abbreviation for corporation. Both of these abbreviations are used by entities that have been incorporated.

13 Steps Incorporation Process

Incorporation is the process a business owner must follow to turn his or her company into a corporation or a limited liability company (LLC). Incorporating a business turns it into its own legal entity with similar rights and duties as a person.

3 Steps on How to Get a Certificate of Status in California

Anyone who owns a business in California and would like to transfer his or her business to another state will need to get a Certificate of Status. This may also be known as a Certificate of Good Standing or Certificate of Existence.

How to form a corporation in California.

Forming a corporation in California requires you to file an Article of Incorporation with the Secretary of State. However, there are other things you must do to comply with corporate law when forming a corporation in California.

Sarbanes-Oxley Act Summary

Sarbanes-Oxley Act, designed to address a fraud and transparency on company shareholders that arose from corporate insider’ conflict of interest.

© Copyright | Nakase Law Firm (2019)