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Incorporation Definition and Examples

Incorporation is the term used to describe the formation and registration of a limited company. When this process is complete, a certificate of incorporation will be issued. The legal status of a limited company is that it is a separate entity from the owners of that business. If you are self-employed and running a business, then that business is not legally a company until such time as it has been incorporated and been given a registered business name. Until this happens, you, as a self-employed person, are legally the business and thus responsible for any liabilities incurred by that business. 

Why choose incorporation?

When you opt to incorporate your business, you create an organisation that has only limited liabilities. This means that any creditors of the business won’t be able to pursue you personally for any monies owed by the business. A limited company, once incorporated, can also have directors and shareholders and can employ people and make tax payments.   

How to arrange the incorporation of a company

Any company that is incorporated in the UK in order to become a limited company has to do so via Companies House, as set out in the Companies Act 2006. It doesn’t matter whether the business in question is a startup or already exists in the form of a partnership or self-employed enterprise. In all cases, incorporation through Companies House is required by law.  

According to tradition, an incorporated business will have the word “limited” or the letters Ltd or Inc added after its name, but this is not a stipulation. Many companies drop a suffix such as Inc if it doesn’t chime with their branding. The company Apple, for example, was incorporated under the full name Apple Inc, while Microsoft is formally incorporated as Microsoft Corporation.     

The advantages of incorporation

Incorporation is the most commonly used means of running a business in the world, and while the details might differ slightly between different legal jurisdictions, the advantages of incorporating a business generally include the following:

  • The assets of any owner – such as their home – are protected from the risk of being pursued based on any business liabilities.

  • It becomes easier to transfer the ownership of the business to another party.

  • Incorporation often makes it possible for the business owner or owners to achieve a lower tax rate on their personal income.

  • Once a business has been incorporated, the owners can raise capital by selling stock in that business. 

The process of incorporation

The act of starting an incorporated business, or incorporating an existing business, begins with the creation of articles of incorporation. These are documents that state the primary purpose of the business and its location. If stocks in the business are to be issued, the articles will also detail the number being issued and the class of stock. A small business might have only a single shareholder, for example, while many larger businesses are publicly traded and have thousands of shareholders. 

The shareholders will elect the directors of the company, and those directors will be responsible for the company’s day-to-day running. They must act in the best interests of the company and are generally elected on an annual basis. The number of directors to be elected will depend upon the size of the company, with smaller companies sometimes having just a single director and larger companies requiring a board of directors numbering a dozen or more.   

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If you’re interested in finding out more about incorporation, or any other aspect of your business finances, then get in touch with our financial experts. Find out how GoCardless can help you with ad hoc payments or recurring payments.

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