The Effects of Incorporation of a Company

Incorporating your company establishes it as a separate entity from yourself. This makes it much easier to sign contracts, open bank accounts and conduct business on behalf of your organization instead of in your own name. This separation from your business, however, also means you'll have to file additional tax paperwork and, depending on your state laws, might have to file annual statements with the secretary of state. If you're debating whether to incorporate, it's generally wise to incorporate only when you're ready to run a business as a truly separate entity, not when you're starting out with a hobby or side project that might not require the protections of incorporation.

Incorporation occurs at the state level, which means you'll file your incorporation papers with your state's secretary of state or division of corporations. Each state establishes its own rules for corporations. Some require annual shareholder meetings or an operating agreement, and incorporation requirements vary with the type of business you choose. Businesses that don't meet annual filing requirements established by their states can lose their incorporated status. If you're a sole proprietor, your options for incorporation could be limited to becoming a limited liability corporation, or LLC.

Incorporation can affect how both you and your business are taxed. Some incorporation strategies, such as incorporating as an LLC, offer pass-through taxation, which means funds are distributed to shareholders, who then report the income on their personal taxes. But other business entities, such as corporations, require additional tax paperwork. You'll need to file tax returns for your business in addition to your personal tax returns and may need to pay yourself a salary from your business rather than simply transferring business assets to your personal bank account.

An incorporated business is a separate entity from its owner or shareholders. This means you'll need separate bank accounts and credit cards for your business. You may need to provide business identification -- rather than just personal identification -- when withdrawing money from the bank. You'll also sign business contracts as a representative of your business rather than as yourself. Some new business owners are accustomed to signing business contracts and documents as themselves, but if you continue to do this after you incorporate, these documents might not be legally binding or could leave all parties unclear about who is responsible for the document -- you or your business.

Incorporation greatly limits your liability for your business's debts. If, for example, you're a builder and a building has a structural defect, your business would be liable for the costs of any lawsuits; you couldn't be sued individually. This liability can still affect your bottom line, though. If you're a sole proprietor or the owner of a small business, you'll probably lose money when your business does. But if your business goes bankrupt, your personal finances and credit can remain intact.

When you incorporate, you can't commingle your business's assets or money with your own. This necessitates careful record keeping and means you'll have to account for any money you pay yourself, your staff or your partners from your business. If you commingle assets, this could cause your corporation to be treated as your alter ego in lawsuits, which means you'll end up with liability for your business's debts.