Incorporating Your Business: Enterprise Birth Pangs

By: Akhil Shahani

If you are thinking of starting a new venture, one of the most important decisions to be taken is how you will go about incorporating your business. Although incorporation can be a longer and more expensive process, as compared to setting up a sole proprietorship or partnership firm, it does have several advantages. Needless to say, incorporating your business is an extremely important activity, and must be embarked upon after careful consideration.

The most important benefits of having a corporate entity are the following:

Lower liability: It is the company that assumes business risk, and not the owners. Thus your personal property is usually protected from being attached by creditors, who can only claim company assets. Having said that, owners and directors can be held personally liable in case found guilty of fraud, neglect or willful wrongdoing. If the business is one that runs a higher risk of lawsuits, you’re much better off incorporating your business, and getting adequate liability coverage. Else, be prepared to be taken to the cleaners.

Tax advantage: Corporations are usually taxed at lower rates and enjoy the benefit of higher tax deductions towards health insurance and medical expenditure and lower payments for social security tax. Your tax advisor will explain this in detail.

Wider financing options: In addition to borrowing from banks, corporations can raise money from the public by issuing equity shares.

Nicer image: A corporation is likely to be perceived as a more established, stable and professional entity as compared to a proprietorship or partnership firm.

Better valuation: If you’d like to keep an exit option open, this may be the deciding factor in favor of incorporating your business. A corporate entity is easier to valuate as compared to other forms of business, and may fetch a better price should you decide to sell.

Incorporating your business will involve certain steps, which are briefly described below.

Decide an identity: This means choosing a name for the business, along with other “property" such as logos and trademarks. Part and parcel of this activity is to establish that the name you have chosen is unique and there are no problems of trademark violation. Also zero in on the type of corporation – Limited Liability Companies (LLC), S Type or C Type.

Decide an address: Finalize your business address. Next, take a decision on which state you will be incorporating your business in. Laws and provisions do vary from state to state. While some like Delaware are favorites for large corporations, for a small business it makes ample sense from a cost and convenience point of view to incorporate in the home state from where the business will operate.

Decide key corporate issues: You will need to file a list of Directors along with the Articles of Incorporation, which is a very important document that gives your business a legal status. You also need to choose the type of shares that will be issued – whether common stock or preferential shares.

Complete incorporation formalities: Get a Certificate of Incorporation from the state office. Complete the process by filing your company’s Articles of Incorporation.

The choice of incorporating your business or going for any other option requires careful thinking. Consider factors like ability to assume personal risk, administrative flexibility under different structures and future capital requirements before taking that call.

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