- What is the Reason for Incorporation?
- Is the Incorporated Company a Business?
- What is an Example of Incorporation?
- What is the Purpose of Company Incorporation?
- What Types of Companies are Incorporated?
- What is the Most Common Form of Incorporation?
- Is That a Good Idea to Incorporate a Company?
- How is a New Company Incorporated?
- Where to Incorporate Your Business?
Let’s have a detailed look at what incorporation actually is, what the company incorporation process is composed of, what kinds of companies exist, and where to incorporate your business.
Incorporation actually refers to the process of company (or corporation) establishment. Incorporation results in the formation of a legal entity whose assets and activity are separated from the owners’ assets and activities.
You can incorporate your company in practically any country of the world, and they will have different names and peculiarities depending on the laws of a particular state. In addition, there are several types of companies that an entrepreneur can incorporate.
Is “company incorporation” the same as “company registration”? No, it is not. In both cases, you make certain steps to make your business legal. However, the result of incorporation is the actual establishment of a separate legal entity that will protect its owner from losing personal assets if a lawsuit is filed against the company. Business registration does not involve this protection: it simply makes your business legal for the authorities if you want, for example, to obtain a license and operate in some areas.
What is the Reason for Incorporation?
The main reason for incorporation is the separation of the business from its owner. If you conduct business as a self-employed person or an individual entrepreneur, you, your activity, and your personal assets (those not connected with your work) form one whole.
If the creditors file claims against you, they will have every right to seize not only the assets you use to generate income (like a computer used by the freelance programmer to write the code) but also your car, apartment, or retirement capital in the bank.
Incorporation makes it possible to separate you from the company and give you limited liability. In other words, a possible seizure will only cover the assets you invested in the company at incorporation, like the amount of authorized capital or paid-up shares (issued in your name).
In addition to this main function, company incorporation may give you certain opportunities, in particular:
- Some activities not allowed for individuals will now be accessible to you (for example, gambling or forex)
- Lowering the effective tax rate (if you properly structure your company)
- Concluding large contracts (many companies are not prepared to cooperate with individuals)
- Sale of company shares (stock) can be private, or you can publicly trade them at the stock exchange.
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Is the Incorporated Company a Business?
The notion of “business” is wider than an “incorporated company.” Business (in other words, receiving profit from some activity) is the activity accessible to a self-employed person, an individual entrepreneur, or even an ordinary schoolboy that sells lemonade in the street.
A company is just an instrument that helps you carry out your business more safely and on a wider scale.
However, a company can also be used for non-commercial activities. In some cases, incorporation will make it possible to create a kind of “wallet”: a structure that manages the company’s assets and real estate whose aim is to receive profit for the owner that is not connected with commercial activities.
What is an Example of Incorporation?
Any brand or company you know is the result of incorporation: Apple (Apple Inc.), Microsoft (Microsoft Corporation) or Amazon (Amazon.com, Inc.) are the entities that were once incorporated.
We can say even more: some of them regularly incorporate new companies by creating new units inside the so-called holding company. In these cases, there is a parent company that owns subordinated units in part or in full. Such units may be located in the same country where the holding company is incorporated or in other countries.
What is the Purpose of Company Incorporation?
Why do entrepreneurs incorporate companies? It depends on the goals they set.
Of course, the first task we mentioned before is to separate the owner from the company and protect personal property from potential court claims and suits.
However, you can set some additional goals you will achieve with the help of your company:
- Simplify acceptance of international payments
- Get access to other markets
- Conclude a large contract
- Complete an IPO
- Sell a part of your business to receive profit or attract investments
- Sell the business to retire or start a new project
- Optimize expenses
- Prepare for expansion
- And many other options
What Types of Companies are Incorporated?
There are several standard types of companies that you can incorporate.
- Limited Liability Company (LLC) is probably the most popular one in the world. In many cases it can be incorporated and owned by one person. Each owner receives shares in the company’s authorized capital. The name often contains reference to the company type: LLC, Limited, or Ltd.
- Joint-Stock Company (JSC) is an entity whose capital consists of shares that can be sold openly (Open Joint-Stock Companies) or be distributed among members only (Closed Joint-Stock Companies). There are usually a lot of shareholders, and the company may decide to complete an IPO.
- Corporations that may be similar to LLCs, JSCs, or even partnerships depending on the country of incorporation and features (that is, if the corporation is similar to a partnership, it does not independently pay the income tax: it is paid by shareholders at the personal income tax rates).
You can incorporate a company from scratch or turn the business that existed in the form of a self-employed person or an individual entrepreneur into a company.
In any case, the company has to be entered into a state register to start its existence, and you will also have to pay the state duty (one-time or annual, depending on the country) and prepare the Articles of Association and some other documents.
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What is the Most Common Form of Incorporation?
LLCs and corporations are established more often in different parts of the world as they may have their peculiar features in different countries.
The types of LLC with one or a few owners are just as popular.
However, large businesses mainly prefer corporations (joint-stock companies) as they are more flexible and make it easier to sell a company share.
Is That a Good Idea to Incorporate a Company?
Every process has its advantages and disadvantages. Incorporation makes it possible to separate you from the company and protect assets (and personal data in some cases).
If court proceedings are instituted against your company, your personal assets will not be taken away from you (except for the cases when you engage in some fraudulent actions).
At the same time, a company will impose certain obligations on you.
First of all, be prepared for additional expenses on its maintenance (reporting, state duties, and taxes). If your income is not very high, there may be no point in the company. However, it will be more convenient for those who receive a middle to high income.
Second, you will have to keep accounting and tax reports that need to be submitted on a regular basis. Even if you establish an offshore company and the respective jurisdiction does not require any reporting to be filed, the documents still need to be kept and held.
Third, many countries will require an annual audit to be held.
Fourth, you need to take into account the laws of the country where the company is incorporated and the income it receives.
Keep it in mind that a company is a powerful and convenient instrument but not a must-have in all random cases.
How is a New Company Incorporated?
Suppose you have a business idea and you are going to implement it. The first thing to do is to choose a name for your business to inform the state and controlling authorities how your project is called. It usually contains references to its legal form, such as LLC, Ltd, Limited, and so on.
This is not always the brand name (for instance, Google’s parent company is now called Alphabet).
Then you prepare the Articles of Association and other documents (if they are required). You will generally need a company description: name, place of incorporation, owner, and the activity it engages in. Separate documents may describe how to conduct business, what goals it sets, and so on.
Then you choose a registered agent. In some countries, you can do so directly using a state register – for example, in the UK. Other countries will require a special intermediary, like in the USA and the majority of offshore jurisdictions.
After that, the application with all documents is submitted to the register, and you pay the state duty and remunerate the registered agent’s services. If necessary, authorized capital is paid up.
Also, you will need to hold a meeting of founders (even if there is a sole founder) where you appoint a director, approve the Articles of Association, agree on the issuance of shares, and execute substantiating documents for all these decisions.
Following that, the company officially starts its existence, but additional actions may be required to carry out business activities. The company may need a bank account, a merchant account, a license, a VAT Taxpayer Number, and many other things. This is determined by the company’s aims and goals.
Where to Incorporate Your Business?
Roughly speaking, there are two ways to incorporate a company: in the country of residence/citizenship or abroad.
The incorporation in the home country is often easier as the starting requirements are usually lower, there is an address available in most cases (which means that you don’t need to rent premises), and opening a bank account may require less effort.
On the other hand, taxes and bureaucratic regulations may be overwhelming. Or you may face another problem: the principal customers may be located too far from you (for example, if you provide the services in a distant corner of the globe).
Incorporation abroad (a foreign or an offshore company) will cost you more during incorporation and maintenance (there are more related costs connected with rent or the registered agent’s fee), but it will allow you to enter new markets and make contacts with customers easier. Choosing a suitable structure and jurisdiction will help you reduce taxes and simplify obtaining licenses.
To conclude, a particular choice (home or foreign country) depends on your objectives.
On our part, we offer you to take advantage of our free consultation focused on choosing a suitable foreign company that would match your aims and needs. We will also help you select a reliable bank and jurisdiction to open a corporate account depending on the details of your business.
Following that, we can provide full support in the process of company incorporation, opening an account, or keeping the accounting reports. Write to us at email@example.com to find out more or contact us via messengers.