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What Does Incorporate a Business Mean?

When a business becomes incorporated, a separate and distinct legal entity is created. An incorporated business acts independently of its business owners. According to the Entrepreneur website, incorporating a business provides the company with most of the legal rights granted to an individual, with the exception of voting privileges.

Formation
A business becomes incorporated when the company's organizers file incorporation paperwork with the state. For example, corporations in Texas must file a certificate of formation with the Texas Secretary of State's office, as a condition of formation. Incorporating a business requires activities, such as selecting individuals to serve as directors, and creating a unique business name. In most cases, a fill-in the blank certificate of formation, also known as articles of incorporation, will be provided by the Secretary of State's office where the corporation is organized. The fee to file a certificate of formation will vary from state to state. However, as of 2010, corporations in Texas are required to pay $300 to file articles of incorporation with the Texas Secretary of State, as mentioned on the Citizen Media Law Project website.

Liability
Business owners of an incorporated business have limited liability protection against the company's debts, obligations and losses. Owners of a corporation may only be liable for business losses and obligations up to their investment in the company. As explained on the Entrepreneur website, the shareholder's personal assets may not be taken to cover liabilities of the corporation. However, shareholders of an incorporated business may be liable for the company's debts if they sign a personal guarantee on a corporate loan. In addition, shareholders that engage in criminal activities will be individually held responsible for their acts.

Formalities
Incorporated businesses must hold shareholder and director meetings, and keep company minutes, as described on the Companies Incorporated website. In addition, corporations must keep accurate banking records that are separate from the personal funds of its owners. Furthermore, an incorporated business must file taxes and annual reports with the state where the company is organized.

Taxes
Owners of an incorporated business may pay taxes twice on the same corporate dollars, also known as double taxation. This occurs when the company pays business taxes on its earnings. If dividends are issued to shareholders from the corporation, the shareholder pays taxes on those dividends at their individual tax bracket. Dividends issued to shareholders of a corporation aren't deductible and don't reduce the corporation's tax liability, as explained on the Entrepreneur website.

Stock
Unlike a sole proprietorship or a partnership, an incorporated business has the ability to issue stock to employees and investors. Corporations with unissued shares of stock can sell shares to raise money for the company. Because an incorporated business has limited liability protection, investors may be more likely to invest in a corporation in comparison to a sole proprietorship or partnership. Employee stock incentives may be used to attract talented individuals to work for the corporation.

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