Incorporation (business)

6 min readMar 25, 2021

Incorporation is the formation of a new corporation. The corporation may be a business, a nonprofit organization, sports club, or a government of a new city or town.

Incorporation across the world[edit]

See also: Types of business entity

The legal concept of company incorporation is recognized all over the world.

In the United States[edit]

Specific incorporation requirements in the United States differ on a state by state basis. However, there are common pieces of information that states require to be included in the certificate of incorporation.

Business purpose
Corporation name
Registered agent
Inc.
Share par value
Number of authorized shares of stock
Directors
Preferred shares
Officers
Legal address of the company/corporation.

A business purpose which describes the incorporated tasks a company has to do or provide. The purpose can be general, indicating that the budding company has been formed to carry out “all lawful business” in the region. Alternatively, the purpose can be specific, furnishing a more detailed explanation of the products and/or services to be offered by their company.

The chosen name should be followed with a corporate identifier such as “Corp.”, “Inc.”, or “Co.”. A preliminary name availability search is advisable, prior to the submission of the Articles of Incorporation. In the case of online incorporation, the state will have the final say with regards to the name chosen for the company. The name shouldn’t deceive or mislead consumers.

Registered agents are responsible for receiving all legal and tax documentation on behalf of the corporation. An Inc.[clarification needed] is the person who prepares and files the Certificate of Incorporation with the concerned state.

Share per value refers to the stated minimum value and generally doesn’t correspond to the actual share value. In reality, the value of a share is based on its fair market value or the amount a buyer is willing to pay. An Inc. stipulates the exact number of shares the corporation is willing to authorize. It is mandatory for every corporation to have stock. If the corporation is willing to permit both preferred as well as common shares of stock, then this should have a mention in the articles of incorporation, along with the voting rights information. Generally, preferred shares provide its shareholders preferential payments of distribution of assets or dividends, in case the company shuts down its operations. A lot of small business owners only allow shares of common stock.

Legal benefits[edit]

There are a number of legal benefits that come with incorporation.

One significant legal benefit is the protection of personal assets against the claims of creditors and lawsuits. Sole proprietors and general partners in a partnership are personally and jointly responsible for all the legal liability (LL) of a business such as loans, accounts payable, and legal judgments. In a corporation, however, shareholders, directors and officers typically are not liable for the company’s debts and obligations. They are limited in liability to the amount they have invested in the corporation. For example, if a shareholder purchased $100 in stock, no more than $100 can be lost. On the other hand, a corporation (Corp.) or a limited liability company (LLC) may hold assets such as real estate, cars or boats. If a shareholder of a corporation is personally involved in a lawsuit or bankruptcy, these assets may be protected. A creditor of a shareholder of a Corp. or LLC cannot seize the assets of the company. However, the creditor can seize ownership shares in the corporation, as they are considered a personal asset.[citation needed]

In the United States, corporations can sometimes be taxed at a lower rate than individuals. Also, corporations can own shares in other corporations and receive corporate dividends 80% tax-free. There are no limits on the amount of losses a corporation may carry forward to subsequent tax years. A sole proprietorship, on the other hand, cannot claim a capital loss greater than $3,000 unless the owner has offsetting capital gains.[citation needed]

A corporation is capable of continuing indefinitely. Its existence is not affected by the death of shareholders, directors, or officers of the corporation. Ownership in a Corp. or LLC is easily transferable to others, either in whole or in part. Some state laws are particularly corporate-friendly. For example, the transfer of ownership in a corporation incorporated in US-DE is not required to be filed or recorded.[citation needed]

Legal history of incorporation in the United States[edit]

Legal opinion on corporations has evolved significantly throughout history, and Supreme Court cases provide a means to observe this evolution. While these cases may seem arbitrary and decontextualized when examined individually, when viewed successively and within historical context, a narrative emerges that offers an explanation for why such views are upheld.

Trustees of Dartmouth College v. Woodward, 1819[edit]

Main article: Dartmouth College v. Woodward

In 1816, the New Hampshire state legislature passed a bill intended to turn privately owned Dartmouth College into a publicly owned university with a Board of Trustees appointed by the governor.[1] The board filed a suit challenging the constitutionality of the legislation. The suit alleged that the college enjoyed the right to contract and the government changing that contract was not allowed. Chief Justice John Marshall delivered the majority opinion and affirmed that the right to contract exists between owners of private property rather than between a government and its citizens. The case was the first case in US history that asked fundamental questions about corporate entities and the protections they enjoy; it also was a precedent-setting case in extending “individual rights” to corporations.

Santa Clara County v. Southern Pacific Railroad, 1886[edit]

The railroad was an expensive multi-year project that greatly changed and altered both the physical and commercial landscape of the country. As with most new technology developments that have a broad impact, there are disputes about how those technologies and the businesses they thrive in fit under the umbrella of laws that govern regulations and taxation. In 1886 one such taxation dispute arose between Santa Clara County and Southern Pacific Railroad.[2] The railroad thought the tax code was misapplied to some of their property and assets. In deciding the case, a unanimous court ruled that governments must abide by the same tax code enforcement for individuals that it did for corporations. While not explicitly stated in the case, it was implied that this case extended equal protection rights to corporations under the 14th amendment.

Liggett v. Lee, 1933[edit]

The booming economy the railroad corporations helped build from the late 19th into the early 20th centuries came to a screeching halt in 1929. The Great Depression, as it came to be known, helped a view of corporations emerge that put them at odds with the normal working man. The election of Franklin D. Roosevelt was a manifestation of many populist sentiments the country might have felt. In 1933 a Florida case came before the court, again disputing taxation.[3] In Liggett v. Lee the court ruled that there could be a corporate tax, essentially saying the structure of business was a justifiably discriminatory criterion for governments to consider when writing tax legislation. This was a unique ruling handed down during a unique time in US history that denied a corporation freedom it sought in the courtroom.

First National Bank of Boston v. Bellotti, 1978[edit]

From 1940 to 1990 the percent of total GDP made up by financial service professionals increased by 300%.[4] Along with that growth there was a growth in the profits this industry experienced as well. As the disposable income of banks and other financial institutions rose, they sought a way to use it to influence politics and policy. In response, Massachusetts passed a law limiting corporate donations strictly to issues related to their industry.[5] The First National Bank of Boston challenged the law on First Amendment grounds and won. First National Bank of Boston v. Bellotti allowed business to use financial speech in political causes of any nature.