What Is an Incorporation?

Incorporation / Incorporations

Incorporation is the legal procedure of establishing a company or organisation as a legal entity separate from its owners. Once incorporated, the business becomes its own legal body, able to own assets, incur liabilities and operate independently.

Purpose of incorporation

  • Legal protection: Personal liability protection for the shareholders shields their assets from legal actions against the business.
  • Access to capital: Issuing shares and bonds to investors, loaning through banks and securitising assets opens up opportunities for growth and expansion.
  • Tax benefits: Some corporations enjoy lower income taxes than sole proprietorships and other entities, depending on the jurisdiction.
  • Credibility: Taking the essential steps to firmly establish the business’s presence in the industry improves credibility and secures the trust of shareholders, customers and partners.
  • Business continuity: Corporations can maintain their operations and identity despite changes in ownership, which proves advantageous for long-term business strategy and stability.

Elements of incorporation

  • Legal entity: After incorporation, the business is treated as an independent legal entity with its own rights and liabilities, separate from its shareholders.
  • Shareholders and ownership: Ownership in an incorporated business is distributed through shares, with shareholders being the owners of the company.
  • Board of directors: Most incorporated entities are obliged to have a board of directors to oversee the business and uphold corporate governance.
  • Articles of incorporation: A set of legal documents outlining the business’s basic details, such as its name, purpose and structure. These are filed with a local governing body to formalise a business’s incorporation.

Types of incorporated entities

Incorporation is a broad term that describes the process of registering a business with a state or country to operate as an independent legal entity, protecting the personal assets of its owners. There are many different types of incorporated entities depending on the jurisdiction, such as: 

  • Private Limited Company (Ltd.): Has limited liability for shareholders, meaning they are only liable for the amount unpaid on their shares.
  • Public Limited Company (PLC): Can sell shares to the public and must comply with stringent regulatory requirements and oversight.
  • Community Interest Company (CIC): Created for social enterprises, focusing on community outreach.
  • Charitable Incorporated Organisation (CIO): A structure specific to charities, allowing them to operate under a single legal identity with limited liability.
  • European Company (SE): Allows certain businesses to operate across the EU under one legal framework.
  • European Cooperative Society (SCE): Designed for cooperatives wishing to operate across the EU, emphasising member ownership and limited liability.
  • Unlimited Company: Gives its members unlimited liability for debts, only used in specific sectors.

Process of incorporation

  • Choosing a business name and verifying its availability.
  • Drafting and filing the articles of incorporation with the relevant government authority. In the UK, this is Companies House. CIOs must register with the Charity Commission.
  • Obtaining an Employer Reference Number (ERN) – if the company has employees – and a Unique Taxpayer Reference (UTR) number from His Majesty’s Revenue and Customs (HMRC) and paying the registration fees.
  • Receiving a Certificate of Incorporation that confirms the company’s official presence.
  • Opening a business bank account in the name of the corporation.
  • Issuing shares to initial shareholders and appointing a board of directors.

Pros and cons

Pros of incorporation

  • Owners cannot be personally pursued legally for the business’s liabilities, except in the case of fraud and some other circumstances.
  • The ability to issue shares allows for easier fundraising and investment opportunities.
  • More professional and trustworthy by investors, clients and suppliers.
  • Can continue operating even if ownership changes, ensuring longevity.
  • Depending on the structure, there may be tax benefits.
  • Buying and selling shares in public companies allows for a smoother transition of ownership.

Cons of incorporation

  • High upfront and ongoing fees, including registration and compliance costs.
  • Adhering to stricter regulations and reporting requirements.
  • In some structures, the profits are taxed twice, at both corporate and shareholder levels.
  • More complicated tax filings and accounting, often leading to higher professional fees.

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