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Incorporation

Reviewed by Komal | Updated on Sep 30, 2020

Catalogue

What is Incorporation?

Incorporation is the legal method used to create a business or organisation. A company is the resulting legal entity which separates the assets and revenue of the firm from its owners and investors.

Corporations may be formed in almost every country in the world and are typically known as such by using words like "Inc." or "Limited (Ltd.)" in their names. This is the method of legally declaring a corporate body as being independent of its shareholders.

How Does Incorporation Benefit?

Incorporation has many benefits for an organisation and its members, including:

  • Protects the property of the owner against the liability of the company
  • Allows for quick transfer of ownership to another party
  • A lower rate of tax than on personal income
  • Enjoys more gentle tax restrictions on carry-forward losses
  • Capital appreciation through the sale of stocks

Companies around the world are the most commonly used legal mechanism to operate a business. While the legal aspects of the company's creation and organisation are different from jurisdiction to jurisdiction, the majority have certain elements in common.

Incorporation includes the drafting of "articles of incorporation," which specifies the company's primary purpose and place, along with the number of shares and type of stock being issued if any.

For example, a closed company does not issue stock. Businesses are held by shareholders. Small companies can have one shareholder, while very large publicly-traded companies can have several thousand shareholders.

In general, the shareholders are solely responsible for paying their own shares. As owners, the shareholders have the right to earn the company's earnings, usually in the form of dividends. The shareholders elect the company's directors too.

The company's directors are responsible for everyday operations. We owe the business, a duty of care and will behave in their best interests. They are usually elected every year. Smaller firms may have a single chairman, whereas bigger firms also have a board composed of a dozen or more executives.

Another Advantage of Incorporation

Effectively, the incorporation establishes a protective shield of limited liability, also called a corporate curtain, around the owners and directors of a company. As such, incorporated businesses can take the risks that make growth possible without exposing shareholders, founders, and executives to personal financial responsibility beyond their original company investments.

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