The concept can be confusing at times, but there is a difference between forming a business and incorporating. Interested in incorporating your business, but not sure exactly what it entails? Here’s the definition of incorporating, plus what it means to incorporate.
What Does It Mean to Incorporate?
A business is formed when the formation involves an “unincorporated” entity. In other words, LLCs, LPs and partnerships are not incorporated, they are formed. When someone talks about incorporating a company, any business lawyer will tell you this means starting a corporation, not forming an LLC.
With the rise of the LLC, the term “formation” has taken hold and the term “incorporate” has migrated in the business vernacular to also refer to an LLC. Academics and business law practitioners still insist on the distinction, but the two have been used interchangeably by the business community.
What Is the Definition of ‘Incorporate’?
In the U.S., incorporating a business is something that happens on a state level. Each state has slightly different rules, regulations, and processes for how their incorporations work. But, as a whole, “incorporate” is defined as a legal act that allows a person to organize a corporation. Once your business is incorporated, you will have the legal shield to protect your personal assets. That shield is not in place until after the company is incorporated.
Why Do People Incorporate?
There are many reasons why business owners incorporate. Here are some of the biggest ones to keep in mind:
- Legal protection. This is one of the most common reasons why a business owner will choose to incorporate. Incorporating your business offers your company select protections under the law of the state in which it’s incorporated.
- Asset protection. Once you incorporate, your personal assets are considered legally separate from those of your company. If there was a legal issue with your company, state law will typically consider your personal assets untouchable after you incorporate. Keep in mind, though, that you’ll need to act as if those assets are separate (through separate billing systems and bank accounts, for example) in order for this to be upheld in court.
- Credibility. Having an incorporation indicator like Inc., Co., or Ltd., after your company name lets others know you’re serious about your business.
- Protection of your business name. In most states, including Delaware, other businesses can’t incorporate their business under the same name as yours.
- Tax options. Corporations can elect to be taxed with pass-through taxation, where the profits and losses are reported on the income taxes of owners on IRS Form K1. This is known as a subchapter S tax status to pass corporate income, losses, deductions, and credit to shareholders of your company. By completing and filing IRS Form 2553 within 75 days of incorporating, the tax return to be filed annually will be the 1120-S. Note that all shareholders must have a SSN to be eligible for this election.
How Do You Incorporate?
Again, the process is slightly different in every state. In Delaware, the process is fairly easy. Typically, you’ll need to take the following steps:
- Choose a company name
- Determine the type of company (do you want to form an LLC or incorporate a corporation?)
- Pick a Delaware registered agent (i.e. a commercial provider with an in-state address who handles legal correspondence for you)
- Submit your details, including your company name and contact information.
- Wait to receive your stamped filed copy of either (1) the certificate of formation (for an LLC) or (2) the certificate of incorporation (for a corporation).
IncNow can handle all of this for you. Just fill out a simple online form, and we’ll take care of the rest. You’ll enjoy the benefits of incorporation before you know it.