There are different types of corporations such as a for profit or not for profit, which would be typical of a church. There are also chartered corporations, which would be typical of a bank, which must follow specific lending practices defined within the charter. Corporations are normally created or incorporated through the state in which they reside or conduct most of their business in. A corporation may also be what is known as a “foreign corporation” with the ability to operate in other states beyond the one incorporated in. Different states will also have different guidelines. Delaware, for instance, is noted for having greater tax advantages for corporations. Nevada on the other hand, offers privacy for the share holders, in that they do not have to disclose their identities or holdings to the public.
Corporations date back to 1601 in England, when Queen Elizabeth 1 established The East India Trading Company. The corporation made it possible to secure investor financing, allowing investors to gain profits upon successful ventures.
When the American colonists gained freedom from England in 1776, American corporations made their beginnings; however, they were only allowed to incorporate after the forefathers approval, and then operating with tight control and restriction. Initially, American corporations were only allowed to be formed if doing so benefited the public, such as for the construction of roads, canals and railways. Even then, these rarely approved corporations had to be dissolved after the intent, or the reason they were created, had been fulfilled. Many changes have taken place since then, including limited liability protection of the shareholders, which was not initially the case.
One reason for incorporating remains constant and the same today as it did for Queen Elizabeth 1, and that is, to obtain capital through investors in exchange for shares of the corporation. Today’s corporations however also offer a protection for it’s shareholders, called limited liability. For example, in a case when a corporation fails or goes bankrupt, the principals, such as the president and secretary for instance, are not held personally responsible. Of course, the shares of the stock may become worthless with debt owed by the corporation, but the principals will still be able to retain their personal holdings, such as homes and personal monies, so long as they are not owned by the corporation. However there are always exceptions. If it is deemed by a court that criminal laws have been broken for instance, individuals may certainly be held responsible. In general though, as long as the corporation is operating legally, it can be very attractive to incorporate a business for this reason versing being a sole proprietorship or in a partnership type business where the individual owners are held personally responsible for all of the business’s actions and are liable to lose personal property and money if the business fails with outstanding debt. A corporation has it’s own ID number, which is the responsible party. A sole propietorship or when in a business partnership, the owners of individual social security numbers are the responsible parties.
How to incorporate
To incorporate a small business, where shares are not initially going to be offered to the public for purchase, the process is fairly simple. A corporate name must be chosen and then searched to be certain that it is not already in use in the state or states chosen to do business in. A corporate charter and by-laws must be created along with the filing of the purpose of the corporation, it’s primary address, principals, along with the type and number of shares. In many cases, depending on an individuals understanding, incorporating can be done without the use of an attorney or CPA. A registration fee will be required to be paid to the state the incorporation is taking place in, which fee will vary depending on the state. If the corporation will be operating in additional states, filing and fees will be required there as well.
Incorporation of a business offers the potential for the corporation to eventually, if not immediately, offer shares for sale to the public through stock exchange’s to raise capital for the business’s operations and growth. These finances may not otherwise be made possible with a sole propietorship or partnership type business.