Incorporating a Business: Turning Ideas Into Realities - Essay Sample

Introduction

Incorporating a business is a phrase that refers to the process of turning a sole proprietorship or partnership into a company that is recognized by the state of incorporation (Mancuso, 2017). In the case study, a group of professionals, particularly instructors, trainers, and course creators from colleges and universities realized that their instructing skills and their ability to share resources could benefit wider society. In consequence, they created a group name and mission statement and starting organizing annual professional development conferences. For the last few years, the group has been successful. Primarily, this paper provides a solution to the existing dilemma of whether the group should incorporate to becoming a legal non-profit corporation that is separate from their respective working institutions or not.

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Advantages and Disadvantages of Incorporating a Business as a Separate Non-Profit Organization

Understanding some of the merits and demerits of incorporating a business to a non-profit organization is essential in decision-making processes. According to Akalp (2014), state incorporation is usually the first step towards becoming tax-exempt with the Internal Revenue Service (IRS). However, it is common for founders of different startups to wonder whether incorporating their business is worthwhile.

One of the advantages of incorporating a business as a separate non-profit organization is the fact that the corporation will be tax-exempt. Considering that the professional group helps in addressing the issues of professional development through their annual conferences, the group's activities could be rendered charitable. As Akalp (2014) argued, the charitable non-profit institution could warrant the state and federal governments to provide exclusions from corporate income taxes and different other taxes. The benefit of a tax-exempt non-profit institution is that it saves on local taxes from the state and county, which are inclusive of property taxes as well.

Incorporation protects organizational members from personal liability. The employees and members of the organization are likely to receive immunity from liability due to corporate debts (Prakash, 2019). Creditors, in such situations, could go for the assets owned by the firm rather than the possessions of the people managing and working for the non-profit organization.

Further, some disadvantages of incorporation include intensive paperwork and increased expense. Some institutions may prefer to hire a lawyer to deal with the processes of documents. Incorporating a business to anon-profit entity also requires a lot of time and energy channeled at complying with regulations and growing an organization (Prakash, 2019). Other demerits include the restrictions of non-profit corporations (Prakash, 2019). In the event when the organization closes, the assets should be given to another non-profit. If the professional group anticipates that the non-profit is likely to grow, integrating it is the best decision to undertake, which should be followed by applying for tax exemption.

Type of NPO and Legal Requirements

The professional group should incorporate as a charitable organization. According to Mancuso (2017), a charitable organization refers to an institution whose main objectives are promoting social well-being by offerings services such as education and other services aimed at enhancing the public good. Some of the services offered by the professional group are professional development, which benefits the public significantly. Consequently, Mancuso (2017) argued that or charitable non-profit organizations are tax-exempt. Such institutions get their funding from donors, grants, service income, contracts from governments and fundraising.

Importantly, different regulations govern charitable non-profit organizations. First, such institutions should not be involved in electioneering. O'Loughlin Banks and Raciti (2018) indicated that the law means that the corporations could not influence in any way the chance of a politician to win or lose an election. In addition to that, the organizations have limited power for advocacy, especially when they desire to change policies that adversely affect them. More so, the institutions ought not to be involved in any lobbying activities. O'Loughlin Banks and Raciti (2018) argued that the charitable non-profit institutions are at risks of penalties or revocation of status, once they violate the regulations. Other regulations include the fact that charitable non-profit entities cannot divert their undue benefits such as excessive compensation and inurement to any person or institution. Inurement, as Peasley, Coleman, and Royne (2018) defined, refers to a situation where a person working within a firm takes money or assets from an institution without claiming or justifying that the amount aims at achieving a particular objective. Similarly, the corporations could be rendered guilty for paying excessive compensations to employees, particularly when the amount exceeds the customary wage for their respective positions.

Steps to Follow When Incorporating

A variety of steps should be followed during incorporation. The first step should involve ascertaining of the existence of the name. The company is identified using the name it registers. However, this may not be an issue in the firm, considering that it registered as a business name initially. The second step involves the preparation of a Memorandum of Association and Articles of Association. The memorandum is also referred to as a rulebook or constitution. It includes information such as the field of business, the company's objectives, and the type of business the company plans to conduct (Leuciuc & Popescu-Cruceru, 2013). According to Leuciuc and Popescu-Cruceru (2013), the memorandum is often divided into five clauses, which are the name clause, registered office clause, objects clause, liability clause, and capital clause. Article of Association is a document stating the rules to be followed within a company (Leuciuc & Popescu-Cruceru, 2013). Mainly, this is inclusive of the contracts between the firm and its members, rights, duties and liabilities of each member.

The third step is the printing, signing and stamping, and vetting of the memorandum and articles created in the second step. As Hemphill and Cullari (2014) indicated, the Registrar of Companies often helps people to draw drafts for their memorandum and articles. After the vetting process by the registrar is complete, the memorandum and articles can be printed and signed by all the group members. The fourth step is a power of attorney. The group should employ an attorney who will act on behalf of the firm and the promoters. The attorney should make changes in the memorandum and articles, where necessary. The benefit of getting an attorney is to ensure that all the legal and documentation formalities for incorporation are fulfilled (von Schnurbein, Perez, & Gehringer, 2018). The attorney will continue with the processes of submitting other documents that require filing with the registrar.

The fifth step entails the statutory declaration form. The declaration states all the requirements of incorporation, as stated in the companies act. It helps to ensure that the rules of incorporation have been followed. The next step involves the payment of the registration fees to the registrar of companies. After the completion of processes, the registrar is likely to issue a certificate of incorporation to the group.

Corporate Formation Checklist

The group needs to do a few things for the business to be incorporated. The checklist includes:

• Finding a business name
• Formation of memorandum and articles
• Creation of governing documents
• Filing of paperwork
• Holding meetings
• Obtaining of Employer Identification Number, which is a painless process often done via the IRS website

Conclusion

To conclude, the professional group should incorporate its business to a separate non-profit entity. Some of the associated benefits include the fact that the organization will be exempted from taxes and personal liabilities. Mainly, this paper describes the process and requirement of incorporating a business such as having a business name, governing documents, power of attorney, and payment of registration fees, to mention a few. Incorporation is not a challenging task. All that is required is following the rules and regulations of incorporation.

References

Akalp, N. (2014). 7 Reasons to Incorporate Your Business Now. Retrieved from https://smallbiztrends.com/2014/02/reasons-to-incorporate-a-business.html.

Hemphill, T. A., & Cullari, F. (2014). The benefit corporation: corporate governance and the for-profit social entrepreneur. Business & Society Review (00453609), 119(4), 519-536. doi: 10.1111/basr.12044

Leuciuc, E.-G., & Popescu-Cruceru, A. (2013). Articles and memorandum of association of the limited liability company. USV Annals of Economics & Public Administration, 13(2), 281-285. Retrieved from http://www.seap.usv.ro/annals/ojs/index.php/annals/article/viewFile/641/608

Mancuso, A. (2017). Incorporate Your Business : A Step-by-Step Guide to Forming a Corporation in Any State. [Place of publication not identified]: NOLO.

O'Loughlin Banks, J., & Raciti, M. M. (2018). Perceived fear, empathy and financial donations to charitable services. Service Industries Journal, 38(5-6), 343-359. doi: 10.1080/02642069.2017.1402888

Peasley, M. C., Coleman, J. T., & Royne, M. B. (2018). Charitable motivations: the role of prestige and identification. Service Industries Journal, 38(5-6), 265-281. doi: 10.1080/02642069.2017.1370457

Prakash, P. (2019). How to Incorporate a Business: Incorporation Made Easy. Retrieved from https://www.fundera.com/blog/how-to-incorporate.

von Schnurbein, G., Perez, M., & Gehringer, T. (2018). Nonprofit comparative research: recent agendas and future trends. Voluntas: International Journal of Voluntary & Nonprofit Organizations, 29(3), 437-453. doi: 10.1007/s11266-017-9877-6