Incorporate

Definition

Incorporate refers to the following two main processes:

Forming a corporation under state regulations provided by the Secretary of State. Incorporating as a corporation provides legal protections and benefits, such as limited liability for stockholders.

Example: Abel intends to enter the real estate brokerage business and wishes to protect his personal assets. He retains a lawyer and pays a $2,500 fee to incorporate the business. Abel is the sole stockholder and chairman of the board of directors. Abel’s personal assets are protected because liability is limited to the assets owned by the corporation.
Providing a geographic area the legal status of a political subdivision of the state. Incorporation as a political subdivision allows residents to elect representatives and self-tax to provide services.

Example: A large subdivision outside a large city petitions the state legislature to incorporate as an independent city. The residents of the incorporated area may elect representatives and tax themselves to provide services.

Frequently Asked Questions (FAQs)

What are the benefits of incorporating a business?

Incorporating a business can offer numerous benefits, including limited liability protection for owners, potential tax advantages, increased credibility, and easier access to capital.

How does incorporation protect personal assets?

Incorporation limits liability to the corporation’s assets, protecting personal assets of shareholders from claims against the business.

What are the steps to incorporate a business?

Typically, incorporating a business involves choosing a business name, filing articles of incorporation, creating corporate bylaws, appointing directors, issuing stock, and complying with other local and state regulations.

Can any type of business incorporate?

Yes, most business types, including small businesses, startups, and large enterprises, can incorporate. The specific filing requirements might vary depending on the state and type of business.

What is the difference between incorporating and forming an LLC?

Incorporating forms a corporation, which is a separate legal entity with shareholders and directors, while forming an LLC (Limited Liability Company) provides liability protection with a more flexible management structure but does not issue stock. Tax treatment and regulatory requirements also differ.

Corporation: A legal entity that is separate and distinct from its owners, providing limited liability and other advantages.
Limited Liability: A legal provision that limits an owner’s liability to the amount they invested in the business, protecting personal assets.
Articles of Incorporation: A document filed with the state to formally establish the creation of a corporation.
Corporate Bylaws: Internal rules and regulations of a corporation, governing its operations.
Legal Entity: An organization that has legal rights and obligations.

Online Resources

References

Moore, Jane. “Understanding Incorporation for Small Businesses.” Business Law Journal, 2020.
Black’s Law Dictionary, 11th Edition.
Investopedia - How to Incorporate a Company

Suggested Books for Further Studies

Heminway, Joan M. “Business Organizations: A Transactional Approach.” Foundation Press, 2018.
Jenney, Beth. “Corporate Law Simplified: Incorporate with Confidence.” Business Guides Press, 2021.
Miller, Roger LeRoy. “Business Law and the Legal Environment.” Cengage Learning, 2019.

Real Estate Basics: Incorporate Fundamentals Quiz

### What is one main advantage of incorporating a business? - [x] Limited liability for owners - [ ] Increased operational costs - [ ] Restricted business activities - [ ] Higher personal taxes > **Explanation:** Incorporation provides limited liability, protecting owners' personal assets from business liabilities. ### Who typically files the Articles of Incorporation? - [ ] A bank representative - [ ] The company's shareholders - [x] The incorporator or attorney - [ ] A customer > **Explanation:** The incorporator or attorney files the Articles of Incorporation with the state on behalf of the company. ### How does incorporating affect taxes for a business? - [ ] It eliminates all taxes - [x] It potentially offers tax advantages - [ ] It significantly increases tax liability - [ ] It has no impact on taxes > **Explanation:** Incorporating can potentially offer several tax advantages, though it depends on the specific circumstances and structure. ### Does incorporating a business require creating corporate bylaws? - [x] Yes, it is a necessary step - [ ] No, bylaws are optional - [ ] It requires state approval only - [ ] Only if demanded by shareholders > **Explanation:** Creating corporate bylaws is a critical step in the incorporation process, governing the corporation's internal operations. ### What does limited liability mean for shareholders? - [x] Shareholders' financial risk is limited to their investment in the company - [ ] Shareholders can lose all personal assets - [ ] Shareholders are exempt from taxes - [ ] Shareholders have unlimited liability > **Explanation:** Limited liability means shareholders are only financially liable up to the amount they invested in the company. ### What entity approves the incorporation of a business? - [x] The Secretary of State - [ ] The Federal Reserve - [ ] The company's board of directors - [ ] The local city council > **Explanation:** The Secretary of State's office in the applicable state typically handles the approval process for incorporation. ### Can a geographic area incorporate as a political subdivision? - [x] Yes, areas can petition to incorporate as cities or towns - [ ] No, only businesses can incorporate - [ ] Only rural areas are eligible - [ ] Incorporation applies only to counties > **Explanation:** A geographic area, such as a large subdivision, can petition to incorporate as a city or town, granting them local governance autonomy. ### How does incorporation affect business credibility? - [x] It generally enhances business credibility - [ ] It reduces credibility among stakeholders - [ ] It has no impact on credibility - [ ] Credibility is determined by revenue, not incorporation > **Explanation:** Incorporation often enhances business credibility, as it indicates a commitment to formal business practices and protections. ### What is one potential drawback of incorporating a business? - [x] Additional regulatory and compliance requirements - [ ] Immediate disqualification from loans - [ ] Higher personal risk for stockholders - [ ] Automatic dissolution after five years > **Explanation:** Incorporation can introduce additional regulatory and compliance requirements that businesses must follow to maintain corporate status. ### Who is protected by limited liability in an incorporated company? - [x] The shareholders - [ ] The company customers - [ ] The government - [ ] The general public > **Explanation:** Limited liability protects the shareholders by limiting their financial risk to the amount they've invested in the company.