When an entrepreneur decides to create a legal entity, he is faced with the question of choosing a business structure. In what form to create a company – LLC (limited liability company, aka LLC) or Incorporation (corporation)?
What it Means to Incorporate a Company
Before understanding the formats of limited liability organizations, it is necessary to understand the meaning of the term “Incorporation”. In the commercial law of English-speaking countries, in particular the USA, the word “Incorporation” has a double interpretation:
- As an adjective. The word “incorporated” is translated as “registered”, “formalized as a legal entity”. Thus, in the business vocabulary of American entrepreneurs, a phrase like “We incorporated last month” is considered common.
2- The legal entity that resulted from the incorporation. It can be an LLC, a private limited company (Ltd.), or a corporation, which can be called either corporation (Corp.) or incorporation (Inc.). The last two names are considered identical, the owner can independently choose the ending and write it in all documents, for example, Alphabet Inc.
The bottom line, any limited liability company can be incorporated, but incorporation does not always result in a corporation. It sounds a bit complicated, but that’s the nature of American commercial law.
What the Incorporation Process Looks Like Step by Step
- The first decision of the founders is in which country to register and conduct business. Of course, it is much easier to do this in your home country with clear legislation and familiar bureaucracy, but opening a legal entity abroad is not associated with super-complicated requirements, and this option is available even to non-residents. In addition, the registration of a company in another country gives a foreign entrepreneur the right to obtain a residence permit.
- After choosing a state, there may be a need to determine the specific region where commercial activity will be conducted. For example, in the U.S., each state has separate laws for business, in other countries commercial activity may be regulated for all equally, except for special territories – free economic zones, where other laws apply.
- Having determined the place of registration (country and region), it is time to make a choice – what will be the organizational-legal format of the company. Each state has a different choice of business structures, in general, similar IE or LLC can be registered worldwide. It is recommended to start with the simplest, fastest and cheapest format, and then if necessary and with the development of the business to change the structure to a more complex one.
- Come up with a unique company name. In some jurisdictions, it is enough that the name of the business does not coincide with other existing organizations within the region (this is a simpler task, because we are talking about a smaller number of legal entities). But there are times when it is necessary to find a unique name within an entire country.
- Prepare the necessary package of constituent documents, pay administrative fees, apply to local authorities to complete the registration procedure of the new legal entity.
- 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.
Summing up, in what form is it more optimal to register a legal entity with limited liability, if the businessman realizes that his business grew out of the format of individual entrepreneurship? Each case is worth considering with a business consultant, but the general business practice is as follows: as long as the size of the company and the level of profit can be called average, it is more profitable and rational to function as an LLC.