Definition
An incorporated company is a legal entity that is distinct and separate from its owners (shareholders). Incorporating a company provides the business with a legal identity of its own, enabling it to own assets, incur liabilities, enter into contracts, sue or be sued, and more. The incorporation process also grants certain benefits, chief among them limited liability, which protects the personal assets of the shareholders from the company’s liabilities.
Examples
- Apple Inc.: A well-known example of an incorporated company, listed on the NASDAQ, it operates independently of its shareholders.
- Procter & Gamble Co.: Another incorporated company, known globally for its consumer goods.
- A small local business incorporating as “John’s Plumbing Inc.”: This business entity is separate from John himself, thus protecting his personal assets from business-related debts and liabilities.
Frequently Asked Questions (FAQs)
Q1: What is the main benefit of incorporating a company?
A1: The primary benefit is limited liability. This means the shareholders’ personal assets are protected against the company’s debts and any potential legal claims.
Q2: How does an incorporated company pay taxes?
A2: An incorporated company is subject to corporate tax rates on its profits, which are usually lower than individual tax rates. Additionally, shareholders pay taxes on any dividends received.
Q3: Can an incorporated company raise funds easily compared to unincorporated businesses?
A3: Yes, an incorporated company often has greater access to capital. It can issue shares to raise funds, and investors may find it more attractive due to limited liability protection.
Q4: Is there a higher compliance burden for incorporated companies?
A4: Yes, incorporated companies must adhere to stricter regulatory and reporting requirements compared to sole proprietorships or partnerships, such as annual reports and audited financial statements.
Q5: What is the difference between private and public incorporated companies?
A5: A private incorporated company does not trade its shares publicly and usually has fewer shareholders. A public incorporated company lists its shares on stock exchanges, allowing the public to buy and sell shares.
- Company: A business organization that sells goods or services in exchange for revenue. It can be classified into different types, including sole proprietorships, partnerships, and corporations.
- Limited Liability: A legal principle where a business’s shareholders are only responsible for its debts up to the amount they have invested, protecting personal assets.
- Shareholders: Individuals or entities that own shares in a company, making them partial owners with a claim to the company’s assets and earnings.
- Corporate Governance: The system of rules, practices, and processes by which a firm is directed and controlled, primarily involving the board of directors.
Online References
Suggested Books for Further Studies
- “Incorporating Your Business for Dummies” by The Company Corporation
- “Principles of Corporate Governance” by Hawley, J.P. & Williams, A.T.
- “Understanding Company Law” by Alastair Hudson
Accounting Basics: “Incorporated Company” Fundamentals Quiz
### What is the primary benefit of forming an incorporated company?
- [ ] Simplified management structure
- [x] Limited liability protection
- [ ] Avoiding taxes altogether
- [ ] Unlimited number of shareholders
> **Explanation:** The primary benefit of forming an incorporated company is limited liability protection. It ensures that the shareholders' personal assets are protected against the company’s debts and liabilities.
### What legal entity status does an incorporated company have?
- [ ] It's an extension of its owners
- [x] It's separate and distinct from its owners
- [ ] It's owned by its employees
- [ ] It's under government control
> **Explanation:** An incorporated company is a legal entity that is separate and distinct from its shareholders, granting it the ability to engage in legal activities independently.
### Which of the following is a true statement about incorporated companies?
- [ ] They do not pay taxes
- [x] They must adhere to higher compliance requirements
- [ ] They can avoid financial audits
- [ ] They are immune to lawsuits
> **Explanation:** Incorporated companies must adhere to higher compliance requirements, including regular reporting and financial audits, unlike sole proprietorships or partnerships.
### Which document officially creates an incorporated company?
- [x] Articles of Incorporation
- [ ] Memorandum of Association
- [ ] Business License
- [ ] Employment Contract
> **Explanation:** The Articles of Incorporation are the documents filed with a state's government that officially create an incorporated company, outlining key details of the entity.
### Can shares of an incorporated company be publicly traded?
- [x] Yes, if it is a public incorporated company
- [ ] No, incorporated companies cannot trade shares
- [ ] Only within certain industries
- [ ] Only with board approval each time
> **Explanation:** Shares of an incorporated company can be publicly traded if the company is set up as a public incorporated company and has listed its shares on a stock exchange.
### What term describes the financial responsibility limitation for shareholders in an incorporated company?
- [ ] Unlimited liability
- [x] Limited liability
- [ ] Joint liability
- [ ] Sole liability
> **Explanation:** **Limited liability** describes the financial responsibility limitation where shareholders in an incorporated company are only liable for the company's debts up to the amount they have invested.
### What is the role of shareholders in an incorporated company?
- [ ] To manage day-to-day operations
- [x] To own shares and have a claim to profits
- [ ] To dictate government policies
- [ ] To audit financial statements
> **Explanation:** Shareholders own shares in an incorporated company, making them partial owners with a claim to the company’s assets and earnings.
### Which entity status allows a company to own property, enter contracts, and sue or be sued?
- [ ] Sole Proprietorship
- [ ] Partnership
- [x] Incorporated Company
- [ ] Informal Business
> **Explanation:** An incorporated company has a separate legal status that allows it to own property, enter contracts, and sue or be sued independently of its shareholders.
### A publicly traded incorporated company can raise funds by?
- [ ] Selling off its assets
- [ ] Taking loans from employees
- [x] Issuing shares on a stock exchange
- [ ] Increasing prices disproportionately
> **Explanation:** A publicly traded incorporated company can raise funds by issuing shares on a stock exchange, allowing the public to buy and sell shares and thus invest in the company.
### What is one common disadvantage of incorporating a company?
- [ ] Easier access to capital
- [x] Higher regulatory compliance burden
- [ ] Increased brand recognition
- [ ] Lower tax rates
> **Explanation:** One common disadvantage of incorporating a company is the higher regulatory compliance burden, requiring more rigorous reporting and auditing than unincorporated businesses.
Thank you for embarking on this journey through the complex yet fascinating world of corporate structures and their implications. Best of luck in your quest to master accounting principles!
