Incorporation is the legal process by which a business entity is formed and recognized as a separate legal entity from its owners. This process provides various benefits, including limited liability, the ability to raise capital through stock issuance, and perpetual existence.
Incorporation typically begins with filing articles of incorporation with the appropriate state authority, often the Secretary of State. This document outlines essential information about the corporation, such as its name, purpose, registered agent, and the number of shares authorized for issuance.
Once a corporation is established, it can enter into contracts, sue or be sued, and own assets in its name. The owners, known as shareholders, enjoy limited liability protection, meaning they are generally not personally responsible for the corporation’s debts and liabilities beyond their investment in the company.
For example, if a corporation incurs debt and cannot pay its creditors, the creditors can typically only seek repayment from the corporation’s assets, not the personal assets of the shareholders. This makes incorporation an attractive option for many entrepreneurs and business owners.
Additionally, corporations have the advantage of continuity; they can continue to exist independently of the ownership changes. This is important for long-term planning and can make it easier to transfer ownership through the sale of shares.
In summary, incorporation is a foundational step for many businesses, providing legal protections and operational advantages critical for growth and sustainability.