DEFINITION of 'Incorporation'

The process of legally declaring a corporate entity as separate from its owners. Incorporation has many advantages for a business and its owners, including:

1) Protects the owner's assets against the company's liabilities
2) Allows for easy transfer of ownership to another party
3) Achieves a lower tax rate than on personal income
4) Receives more lenient tax restrictions on loss carry forwards
5) Can raise capital through the sale of stock

Incorporation involves drafting an "Articles of Incorporation", which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued, if any. Incorporation will also involve state-specific registration information and fees.

BREAKING DOWN 'Incorporation'

Incorporation creates a protective bubble around a company's owners, shareholders and directors. Incorporated businesses can take the risks that make growth possible without exposing the shareholders, owners and directors to personal financial liability outside of their original investments in the company.

In the United States, incorporated businesses have legal endings such as Inc., Ltd. or Corp. The same general process is used around the world, although legal endings vary by nation.

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