What are the advantages of an incorporated business? Automatic translate

When an entrepreneur decides to create a legal entity, he is faced with the issue of choosing a business structure. In what form should a company be created - LLC (limited liability company, also known as LLC) or Incorporation (corporation)?

Entrepreneurs make a choice between these two types of entities because both an LLC and a corporation are characterized by limited business liability. This means that the founders, shareholders and directors are not liable with personal property for the company’s obligations. If problems arise in the business, for example, creditor claims or tax debts arise, then the executive authorities will be able to confiscate only corporate property, and the personal assets of the company owners are separated and protected.

What does it mean to incorporate a company?

Before understanding the formats of limited liability organizations, it is important to understand the meaning of the term “incorporation.” In the commercial law of English-speaking countries, in particular the United States, the word “Incorporation” has a double interpretation:

1. As an adjective. The word “incorporated” is translated as “registered”, “registered as a legal entity.” Thus, in the business vocabulary of American entrepreneurs, a phrase like “We incorporated the company last month” is considered common.

2. A legal entity that was created as a result of incorporation. This can be an LLC, a private limited company, Ltd., as well as a corporation, which can be called either a corporation (Corp.) or an incorporation (Inc.). The last two names are considered identical; the owner can independently choose the ending and write it down in all documents, for example, Alphabet Inc.

In summary, any limited liability company can be incorporated, but incorporation does not always result in a corporation. It sounds a little complicated, but that is the nature of American business law.

Advantages of registering a legal entity

Here are the advantages of incorporation for an entrepreneur:

• The opportunity to engage in activities that are not available to individual entrepreneurs and the self-employed (selling alcohol, organizing a private security company, insurance or credit activities, being a stock broker - each country has different restrictions for individual entrepreneurs).
• Choosing the optimal tax system.
• The opportunity to enter into transactions with large customers, because most legal entities do not want to cooperate with private executors or individual entrepreneurs.
• Possibility to sell the company in the future – partially or completely.
• Opportunity to scale the business, including entering foreign markets.
• Opportunity to do business together with partners, hire more staff.
• Making tax deductions means deducting certain business expenses from the tax base and thus reducing the fiscal burden.

Now let’s look at how an LLC differs from a corporation, and which format is best for an entrepreneur to choose.

Features of LLC - pros and cons of registration

• Registering an LLC is much easier and cheaper than registering a corporation. Fewer documents are required, fees are lower, and the process can be completed almost entirely online.
• The sole owner of an LLC can declare income in personal tax reports, report all profits and losses of the company, and optimize the tax burden.
• Co-owners of an LLC are called participants; they receive profits and pay taxes not as a legal entity, but as self-employed people.
• Ownership of the company’s assets is distributed equally among the members, regardless of their number, which means that the co-owners of the LLC have the same decision-making power.
• The rules for doing business for LLCs vary from jurisdiction to jurisdiction, which can create inconveniences if the business operates in multiple regions.

Features of a corporation - pros and cons of registration

• This is the optimal business structure if the company achieves excess profits.
• Founding a corporation is a more complex and lengthy process than registering an LLC. The founders are required to elect a board of directors, hold annual meetings, and prepare public financial statements.
• You can choose one of two types of corporations – C corp or S corp, which differ in taxation mechanisms and thus optimize tax rates.
• A corporation is one of the few business structures that has the right to issue shares, which means the ability to change the composition of shareholders and the board of directors, attract investment capital, and sell shares of the company.
• Co-owners of a corporation who have the right to make decisions are called shareholders, and receive their share of net profits in the form of dividends.
• Ownership and level of influence in a corporation depends on the number of shares each partner owns - the more shares, the more decisions the co-owner makes.
• The corporation form is best suited for creating a non-profit organization, which also includes trust funds and asset management companies.

What does the incorporation process look like step by step?

1. The first decision of the founders is in which country to register and conduct business. Of course, in your home state with clear legislation and familiar bureaucracy, this is much easier to do, but abroad, opening a legal entity is not associated with extremely complex requirements; this option is available even to non-residents. In addition, registering a company in another country gives a foreign entrepreneur the right to obtain a residence permit.

2. After choosing a state, there may be a need to decide on a specific region where commercial activities will be conducted. For example, in the USA, each state has separate laws for business; in other countries, commercial activities can be regulated equally for everyone, with the exception of special territories - free economic zones, where different laws apply.

3. Having decided on the place of registration (country and region), it’s time to make a choice - what the organizational and legal format of the company will be. Each state has a separate choice of business structures; in general, analogues of individual entrepreneurs or LLCs can be registered all over the world. It is recommended to start with the simplest, fastest and cheapest format, and then, if necessary and as the business develops, change the structure to a more complex one.

4. Come up with a unique company name. In some jurisdictions, it is enough that the name of the business does not coincide with other operating organizations within the region (this is a simpler task because we are talking about a smaller number of legal entities). But it happens that you need to choose a unique name within an entire country.

5. Prepare the necessary package of constituent documents, pay administrative fees, contact local authorities to complete the procedure for registering a new legal entity.

6. Before opening and starting commercial activities, understand the additional requirements regarding your type of company. It may be necessary to obtain separate licenses, permits, and patents.

To summarize, in what form is it best to register a limited liability legal entity if a businessman understands that his business has grown out of the format of individual entrepreneurship? Each case should be reviewed with a business consultant, but the general business practice is that as long as the company’s size and profit level are average, it is more profitable and efficient to operate as an LLC. If the business grows to a large scale, the optimal form of activity will be a corporation. These recommendations are not final options, because in any country a business can change its organizational and legal structure, depending on the goals, pace of development and plans of the owners. This means that forms of ownership can change; the founder of a legal entity can be not only a private person, but also another organization. In general, any transformation of business activity is possible if you adhere to local legislation and are accompanied by competent lawyers.