Incorporating a business means going through the process of establishing a new legal entity or company. There are many reasons why you should incorporate your company: an incorporated business has a separate legal identity from its owners or shareholders, which can protect its personal assets, and it can also provide enhanced credibility and better expansion opportunities.
This article introduces the legal concept of company incorporation and explore the advantages of incorporating a business. We will also discuss how to find a consultant to start the process. If you need help preparing for company incorporation in Singapore or abroad, please check our list of experienced business consultants.
When a business incorporates, means that it has been registered with a governing authority as its entity separate from its owners. A corporation is an autonomous legal entity that conducts business with limited liability and perpetual succession. The term "corporation" typically refers to the entity, while "incorporation" denotes the process of forming this legal entity.
Incorporation means a business is its legal entity, separate from the individuals who started it. This provides several benefits, including protecting personal assets and the ability to do business under the company name. 'Inc.' or 'Limited' which can also be included in corporate names. Hence, a private limited company is usually an incorporation. The key objective for incorporation is to restrict the responsibility of shareholders by separating business assets from their personal ones. This would decrease the owners’ liability, mainly when numerous shareholders are involved in a corporation.
Most corporations are for-profit and generate income to provide returns for their shareholders, who own different percentages of the company. Some corporations are not-for-profits and exist to serve the public good or a particular service rather than making money. Not-for-profit business entities, also known as charitable organisations, use their revenues to further their cause instead of distributing it among shareholders. These causes can be educational, religious, scientific or research purposes.
Business incorporations may be divided into the following structures (with slight variations in different countries):
Incorporation occurs when a business becomes a legal entity by filing the necessary documents, such as the Articles of Incorporation or Certificate of Incorporation, with relevant authorities. After the incorporation documents are filed, the business is legally organised and granted corporate status. The government helps with this process, which must be completed following established incorporation law.
This system safeguards creators and shareholders and enhances economic stability. In other words, restricted liability enables the steadiness of the business to remain unconnected from its owners’ personal finances. This signifies that if there were a lawsuit, for example, owners would not be held accountable. Consequently, the owner's individual assets are protected against any possible legalities.
In many countries, corporations are the most commonly used type of business entity. However, while the legal details of a corporation's formation and organisation may differ depending on location, most share certain elements.
To incorporate, you need to draft "articles of incorporation", which will include the company's purpose, location and amount of shares issued. If it's a closed corporation, then no stock is being issued. Companies are owned by their shareholders, sometimes just one shareholder for small businesses and thousands for big corporations that are often traded publicly.
Shareholders are only responsible for the payment of their shares and, as owners, are entitled to receive the company's profits in dividends. Shareholders also elect the directors of the company.
Directors are in charge of a company's day-to-day activities. They have a duty to the company to ensure it does well and is run properly. Directors are voted for by shareholders every year. Small companies often only have one director, but more prominent companies usually have boards with 12 or more members. Unless they've committed fraud or broken tax laws, directors aren't personally responsible if the company can't pay its debts.
Corporations are legal entities that exist separately from their shareholders. Shareholders usually elect a group of people, called the board of directors, to oversee the company on their behalf. The board of directors is responsible for maintaining corporate records and ensuring the business runs. In most cases, shareholders receive part of the corporation's profits.
Share/profit ownership incentivises shareholder investment in a company. A corporation may have one owner or multiple shareholders, with the latter being more common. Shareholders enjoy limited liability, meaning they are not held responsible for the actions and finances of the business. Instead, responsibility falls on the shoulders of the corporation itself.
The lifespan of a corporation ends when there is an amendment to its charter or it has achieved its maximum growth potential. This process is known as liquidation and uses a liquidator for assistance.
The corporate assets will be sold to pay off debt, and the proceeds will go to creditors first. Shareholders will receive what remains. Insolvent or bankrupt a company's creditors often cause involuntary liquidation.
Are you debating whether or not to incorporate your new business? If so, know that there are several benefits to doing so. There are several advantages of incorporation for businesses and their owners, which include:
The benefits of incorporation are many and varied and can be the key to unlocking the potential growth of your business. This vital step will lay the foundations for success that will help you determine how best to grow your business---saving time and money.
One significant advantage of a corporation is that it limits the personal financial liability of its directors to the company's creditors. To put another way, if a company goes bankrupt, shareholders are not held accountable for any debt incurred and are limited to only the assets owned by the said company.
Without a personal guarantee, a creditor cannot claim your assets to off any debt you may owe them. Even so, many banks still require some form of personal guarantee.
A corporation is a business entity that has legal rights and protections separate from its owners. The owners of a corporation do not own its assets directly. Instead, they own shares in the corporation, which owns the assets. This makes it much easier to transfer ownership interests.
This ability to transfer ownership makes it easier to attract investments. For example, venture capitalists prefer a company whose organisational structure is not convoluted, so they can exit their investment on pre-agreed terms without delays.
Creating a corporation can give your business an air of credibility, making it more attractive to potential investors, lenders, suppliers and customers. Employers will also see that you're dedicated to the company's longevity.
Note that forming a corporation does come with some extra cost and hassle. For example, corporations must keep different accounting records from owners, pay yearly registration fees, and submit distinct financial reports and tax returns. Though these might be seen as nuisances, they're ultimately worth it if you want your business to become a reliable long-term enterprise.
Incorporation also makes it easier to raise capital and obtain grants. Being a corporation can add credibility to your business, making applying for financing or negotiating with a supplier easier.
In addition to the increased public interest, corporations are more likely to receive financial assistance from venture capitalists or investors. A lot of financial institutions in different countries offer several loans and grant programs available only to incorporated businesses.
Company registration also provides tax benefits because corporations generally pay lower taxes. Corporate tax rates are usually lower than personal income tax rates.
Singapore companies for example enjoy benefits such as personal asset protection, tax advantages, and increased customer credibility. But where should you incorporate it? In general, the company will benefit from similar advantages whether incorporating locally or internationally. Choosing between local or international incorporation primarily comes down to your business's expansion plans—if you don't plan to expand outside of your country, there's no need to go through the extra hassle (and expense) of another incorporation process.
On the other hand, it's better to incorporate locally if you're looking to do business in multiple countries. This way you will have the advantage of having the same name everywhere in the origin country, as well as the flexibility to locate or move your business.
The reason for structuring a company is to establish three different legal entities: one for the business, one for the owners, and another for the managers. The following requirements show how to set up a corporation.
You'll need to settle on your corporation's business name first. Please be careful about your name because it will reflect your business. That said, make sure the name is legally available before moving forward.
Although business naming rules depend on the country, most of them contain these general pointers:
The address of your business is the location where it receives mail or its headquarters. In some countries, using a P.O. box is allowable. For the Singapore company registration for example, it must be a registered address in Singapore.
When preparing the Memorandum of Association and Articles of Association (or an equivalent document), follow all laws and regulations accordingly.
After you finish the documents, print and sign them and check the accuracy of your country's Articles of Association from your corporate before stamping them. Furthermore, hiring an attorney or consultant allows an expert to represent your business---this person is called an agent who can manage business records, make contracts, deal with legal cases and more.
The articles of incorporation must list the names of some of your decision-makers. You might have to identify incorporators and directors, two types of decision-makers. Incorporators' duties typically end once the board of directors are chosen.
Depending on the country, you may also have to list the corporation's initial board of directors. The primary responsibility of a board of directors is setting corporate goals and policies and naming officers. In smaller businesses, the board is typically composed of business owners. However, there is no share requirement for being a director. By law, each country generally has a minimum number of required directors, which falls between one and three people.
A corporation's owners, known as shareholders, own stock in the business. The articles of incorporation typically need to specify how many shares of stock the company is authorised to issue. You can leave the shareholders' names as is.
It would be beneficial if your internal corporate records included every shareholder's name along with the number of issued stocks each one has.
The articles of incorporation must include the name and address of someone who can represent the corporation in legal documents, notices, and lawsuits. This person is called a registered agent or statutory agent.
If you don't have an office in the country where you're initially incorporated, or if you prefer to have someone else act as your agent, you can hire a registered professional agent. For a Singapore company, the representative needs to be a citizen. In addition to the articles of incorporation, you'll need bylaws that will guide how your corporation operates.
When you have finished all the steps in the incorporation process, additional documents such as the consent of directors, a notice of registered address, and particulars of directors will need to be submitted. In some countries you will need to designate a company secretary or set up a corporate bank account prior to company registration. You will also need to detail your business activities especially if it is branch or subsidiary company.
After preparing all the necessary documents and fulfilling all statutory requirements for your company formation, registration, and documentation fees must be paid. Once these are paid, you will be issued a Certificate of Incorporation by the corporate regulatory authority, which officially creates your corporation.
People often think that filing articles of incorporation is all they need to do to start a business. Still, there are many other steps required before the process begins.
A business lawyer or consultant can often be overlooked, but they play an important role in ensuring all your paperwork is updated. A good business lawyer will also ensure that your company isn't doing anything illegal and will keep open communication with you to avoid legal issues.
The corporate service provider must assist you in the following activities:
A company must have a board of directors to be fully incorporated. Some articles of incorporation designate the initial directors, while others do not. If this step has been bypassed initially, then an appointer is detailed in the forms and appoints the directors through a document like Written Consent.
Adopting bylaws is a vital step for any new corporation, and these bylaws can be drafted before or after this step. The bylaws and board minutes documenting the directors' adoption of the bylaws into effect must be created. Another document, Written Consent of the Board of Directors Without a Meeting (or an equivalent document), may also be used to accomplish this task; however, holding an official board of directors meeting will provide greater assurance that everything has been done correctly. Officers should always be present at meetings regarding standard matters.
Shareholders are a necessary aspect of any business corporation. For stocks to be considered valid, there must be issued but sanctioned stock registered in the articles of incorporation. Finally, the board of directors must pass a resolution authorising the stock. The company will need to have some certificates issued for this stock. Each founder must have a written agreement outlining the terms of their purchase, including how much they are paying for each certificate. These payments should be made to the corporation itself. A ledger should be created listing all of the corporation's stockholders and officers.
While this step is not required for all businesses, it may benefit corporations with more than one founder. Having a shareholder agreement prevents co-founders from selling their shares to anyone. There are provisions in case of the death or immobilisation of a founder, as well as if the shares are lost through bankruptcy or divorce. This step protects not only the investments made by the corporation but also the founders themselves.
Submitting shares to a vesting schedule is typical for founders of a corporation. Doing so ensures the founder has a vested interest in the company and regularly contributes or else risks losing their due to the set schedule. This action protects others' contributions and interests and prevents those with large ownership from loafing without consequence. Vesting typically occurs over several years.
After you file your paperwork and articles of incorporation, it's essential to hire a business lawyer so they can ensure the validity of your newly incorporated company, founders usually rely on the limited liability protection that these types of businesses provide, but many forms and documents are often involved in the process. A business lawyer will ensure everything has been submitted correctly—and on time—so that you can get your corporation up and running smoothly.
To have a successful business, it is important to maintain high profitability and growth levels. Incorporation provides several advantages that can help with this. From tax benefits to creating legal entities for your business, these advantages make incorporation one of the best ways to build and sustain a successful business.
Look through our list of business consultants and lawyers to help you prepare for company incorporation.
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