Incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm’s assets and income from its owners and investors.
Corporations can be created in nearly all countries in the world and are usually identified as such by the use of terms such as “Inc.” or “Limited (Ltd.)” in their names. It is the process of legally declaring a corporate entity as separate from its owners.
Incorporation is the broad term to describe a business registered with a state to become a separate legal entity. That business entity often is owned by shareholders (even if it is a single-member owned corporation) that may also be overseen by a board of directors.
A company does not need to be incorporated to operate a business. Business owners may elect to operate as a sole proprietorship or a partnership instead. These two legal business formations treat company debt and taxes differently than compared to an incorporated entity.
Another primary difference between legal entities and one of the most important reasons a company may want to incorporate is for the advantage of issuing stock. When a company incorporates, it gains the ability to share ownership of the company by issuing shares of stock.
Whereas a sole proprietorship or partnership is usually only owned by those operating the company, incorporating allows a business owner to sell an ownership stake in part of the business.
A business may also choose to incorporate as a corporation of a limited liability company. The filing requirements for either depend on the state the business is filing in, though each type of incorporated entity will have its separate form.
Incorporation involves drafting “articles of incorporation,” which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued if any. A closed corporation, for instance, would not issue stock. Companies are owned by their shareholders. Small companies can have a single shareholder, while very large and often publicly traded companies can have several thousand shareholders.