Definition of Incorporating a Business

If you own and operate a small business or plan to start one, you've probably heard people refer to companies as incorporated (or not incorporated), and you might have wondered exactly what that means. As with many legal terms, the word "incorporated" can mean different things depending on the context.

Legal Definition of 'Incorporated'

In its most technical, formal sense, the word "incorporated" means that a business has formed a corporation in one of the 50 states and is therefore a legal entity separate from its owners.

Corporations form by filing articles of incorporation (sometimes called certificates of incorporation) with the applicable state agency in charge of administering business entities—often the Secretary of State. For most companies, articles of incorporation are relatively simple and contain just a few items of basic information about the corporation:

• Entity name (which must be different from other corporations already formed or registered in the state)
• Main business address
• Name and address of its registered agent in the state
• Name and address of its incorporator
• Purpose of the corporation (its intended business activities)
• Number and classes of its authorized shares of stock

To complete the incorporation process, a corporation must also do the following:

• Issue stock to its shareholders, typically by issuing share certificates in exchange for an initial capital contribution
• Elect a board of directors by a vote of the shareholders
• Appoint officers by a vote of the directors
• Adopt a set of bylaws setting out the corporation's governance rules
• Obtain an employer identification number from the U.S. Internal Revenue Service
• Open a bank account

An online legal services provider can help your business form a corporation and draft the necessary documents, including articles of incorporation, bylaws, and director and shareholder resolutions.

Informal Definition of 'Incorporated'

In addition to the technical definition of "incorporated," the word often takes on a more informal, colloquial definition and refers to any process by which a business becomes a legal entity separate from its owners. So, for example, even though a limited liability company (LLC) or limited partnership technically forms or organizes when its organizer files articles of organization or a certificate of limited partnership with a state agency, it's not unusual for non-lawyers and businesspeople to describe those companies as incorporated once they complete that process.

Although LLCs technically do not incorporate, the high degree of flexibility granted to members (the LLC's owners) under state LLC statutes and federal tax law can allow an LLC to function much like a corporation.

Reasons to Incorporate

There are three major reasons businesses decide to incorporate.

Liability Protection

Corporations protect their shareholders from company debts and other legal obligations. Customers, lenders, employees, suppliers, tax authorities, landlords, and anyone else who might have a legal claim against the corporation can only look to the corporation's assets for payment or compensation. For example, a supplier with an unpaid invoice can sue the company, win a judgment in court, and place a lien on the corporation's bank account, but it usually can't seek remedies against the shareholders or their personal assets, such as houses and cars.

However, if the shareholders do not treat the corporation as a separate legal entity that owns and operates a business and do not consistently comply with the corporation's legal formalities (maintaining separate bank accounts, segregating business and personal expenses, holding shareholder and director meetings, etc.), they can lose that liability protection.

Outside Investors

If the founders of a business want to attract outside investors who own a financial stake in the company but don't want to manage it on a day-to-day basis, forming a corporation is a good first step because it provides a legal structure for issuing different types of ownership interests.

Professionalism

Prospective customers, clients, employees, vendors, and lenders often view incorporated businesses as more professional and reputable than those operated as sole proprietorships or partnerships. As a small business grows and begins to develop relationships with a variety of third parties, forming a corporation can be a way to raise the company's profile and appear more established.

If your business plans to form as a legal entity, an online legal services provider can help you figure out which type of entity makes sense for your particular situation.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

Definition of Incorporating a Business

Source: https://info.legalzoom.com/article/what-does-incorporated-mean-business

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