Business Incorporation Explained
Business incorporation is a form of legal arrangement open to any business. There are advantages and disadvantages to the corporate form of business which is why you need to consult with your lawyer and accountant to determine if incorporation is the form that you require. The differences refer to liability and taxes. The profits of a corporation are taxed at the corporate profits tax rate. The part of corporate profits that the stockholder, or owner, receives is called dividends. The stockholder pays taxes on the dividends at the individual tax rate. Therefore, dividends are a part of corporate profits that are subject to double taxation. This is one of the disadvantages of the corporation.
A corporation is a legal entity in its own right. It has all of the legal rights and responsibilities of a legal person. It is responsible for its own debts. This means that the corporation’s credits can not file against the assets of the stockholder, only against the assets of the corporation. The most the stockholder can lose is the cost of his stock. He cannot lose more than what he paid for the stock because he cannot be held personally responsible for the debts of the corporation.
Incorporation of a business take place in accordance with the rules and laws of the state the incorporation is in. You don’t have to incorporate in the state in which you live. Most big corporation incorporated in Delaware because Delaware used to have the most favorable laws for corporations. Today, Nevada and Delaware offer the most favorable incorporation laws. Nevada is a friendly state for incorporating in because it doesn’t tax corporate profits or franchises. It also affords corporate stockholder privacy and liability protection because the stockholders do not have to be on public record. Delaware offers low incorporation fees, low franchise taxes and no state tax on the profits on the corporation. In addition, Delaware provides a separate court system for businesses which offers speedy decisions. You can also establish an international business corporation that is registered off-shore. There are various rules and advantages that apply to this form of business.
You need to check the laws of incorporation in the state you plan to incorporate in. Usually you will want the services of a law firm when you incorporate although you can fill out the forms yourself. There are fees involved in using a law firm but it is usually worth it to have their advice.
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