Legal Definitions - incorporation

Incorporation is the legal process of formally creating a new business entity, known as a corporation, that is recognized by law as a separate legal person. This means the business becomes distinct from its owners, possessing its own rights, responsibilities, and liabilities. The process typically involves filing specific documents, such as Articles of Incorporation, with a relevant state government agency.

Here are some examples to illustrate the concept of incorporation:

• Example 1: A Small Business Seeking Protection

  Imagine Sarah, a talented baker, has been running her custom cake business as a sole proprietorship. As her business grows, she worries about potential lawsuits if a customer gets sick from a cake or if her delivery van gets into an accident. To protect her personal assets, like her home and savings, from business debts or legal claims, Sarah decides to undergo incorporation. By filing the necessary documents with her state, her baking business becomes a corporation. Now, if the business faces a lawsuit, it is the corporation, not Sarah personally, that is primarily responsible, thus shielding her personal wealth.

• Example 2: A Tech Startup Attracting Investors

  A group of university friends develops a groundbreaking new mobile application and wants to secure funding from venture capitalists to scale their operations. Before approaching investors, they decide to pursue incorporation. Forming a corporation allows them to issue shares of stock, which investors can purchase, representing ownership in the company. It also provides a clear legal structure for governance, defines the roles of directors and officers, and offers limited liability to investors, making the company a more attractive and credible entity for significant investment.

• Example 3: A Community Group Establishing a Charity

  A local community group wants to create a formal charity to raise funds for environmental clean-up initiatives in their town. To gain legal standing, open bank accounts in the charity's name, apply for tax-exempt status, and protect the individual board members from personal liability, they undertake the process of incorporation as a non-profit corporation. This legal step gives their charitable organization a distinct legal identity, allowing it to enter into contracts, own property, and operate officially as a recognized entity separate from its founders.