Incorporation is the legal process used to form a corporate entity or company. A corporation is the resulting legal entity that separates the firm's assets and income from its owners and investors.

• Incorporation is the way that a business is formally organized and officially brought into existence.
• The process of incorporation involves writing up a document known as the articles of incorporation and enumerating the firm's shareholders.
• In a corporation, the assets and cash flows of the business entity are kept separate from those of the owners and investors, which is called limited liability.

Why Incorporate?

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation.

Advantages of Incorporating

• Owners are protected from personal liability for company debts and obligations.
• Corporations have a reliable body of legal precedent to guide owners and managers.
• Corporations are the best vehicle for eventual public companies.
• Corporations can more easily raise capital through the sale of securities.
• Corporations can easily transfer ownership through the transfer of securities.
• Corporations can have an unlimited life.
• Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to "double taxation" on profits. To avoid this, many business owners elect to operate their corporations under subchapter S of the Internal Code. Also known as an S corporation, this entity allows income to pass through to the individual shareholders.

Disadvantages of Incorporating

• Corporations require annual meetings and require owners and directors to observe certain formalities.
• Corporations are more expensive to set up than partnerships and sole proprietorships.
• Corporations require periodic filings with the state and annual fees.