Every business will require a name and Business structure to function on its own. To ensure the functioning of the business is not hampered many prefer it to be incorporated. In corporations help in detaching the business entity from personal hold, allowing the entity to function on its own. With incorporation there is scope for further structural changes within the entity based on functioning and future scope. This change can be done at any stage of the business. The entity type differentiates itself from similar businesses in that field. With entity type it is possible to determine the liability for the entity.
There are basically 6 different types of entities in which a business can be incorporated into. These are categorized as Sole proprietorship, Limited liability company (LLC), Partnership, Cooperative, C- Corporation and S- Corporation. The sole proprietorship entity acts as the base for all other entities. From this entity the business can be transformed to any other entity. Based on the entity type the liabilities to the individuals responsible will vary. The suitability of each entity to a business is dependent on risks involved in functioning of the business.
A few elemental factors in Business Incorporation are:
- Personal liability protection is gained to certain extent. It depends on the situation and law for this to be revoked.
- Benefit on tax is received in certain situations and to a limit. The actual marginal tax rate might be a concern for smaller business entity.
- Business will gain an identity for itself, entirely independent from that of founders or administrators. A long lifetime can be enjoyed by the organization regardless of the dependency on human lifetime.
- Though the initial cost of investment is high, it is possible to get a return on investment through selling of shares. This also acts as an income to the business. Also the assets can be leased out wherever possible to gain income.
- It is possible to transfer the ownership from an individual to another. Changing the type of entity the organization is much easier when incorporated. This can pose as a challenge to shareholders on the assets and profits.
Incorporation for any organization is dependent on the function and size of the business. Even the local governmental policies at regional, state and national level also affect the choice of entity type. Many governments offer more beneficial policies as encouragement to have businesses in economically backward places. Certain policies and regulations help the entity in gaining protection against risks.
Choosing the right entity is very important for any business. The selection of type will help in determining their risk and liabilities while functioning, even in worst case scenario. It is better to have a legal and financial advisers to get good guidance before, while and after incorporation. Government policies are amended frequently. Hence, the business entity incorporated into must be able to follow and abide by the updated policies and regulations. Having a business incorporated into any entity has various effects on each business and organization. The organization must be prepared to face these challenges and adopt with changes.