The competitive and fast pace economy’s growth can be a challenging task to establish a company. However, it is an essential undertaking in achieving long-term success and stability. Establishing company incorporation can be considered one key point toward your future goal.
Company incorporation refers to the legal process of forming a new corporation or limited liability company (LLC). This company is a separate entity from its owner. Either formalizing the existing business or starting a new one, this article will guide you to learn further about the meaning of an incorporated company. Furthermore, the benefits and drawbacks are for your consideration.
What is Company Incorporation?
The meaning of company incorporation is the formal process of establishing a separate legal entity for a new corporation, independent of its owners. In a wider context, incorporation refers to the process of registering a business with the state to establish it as a separate legal entity.
The process of incorporation is not limited to new companies; existing ones can also undergo incorporation to register the business. Other than companies, non-profit organizations or clubs can also be incorporated.
It is possible to create corporations in almost every country in the world. They are commonly identified by the use of terms like “Inc.” or “Limited (Ltd.)” in their names. Once the company is successfully registered, it then functions as its own entity and limits the liability of the owners. Depending on the type of business entity, shares, common stock, or guarantees may need to be set aside as collateral for liability purposes.
When a company incorporates, it gains the capability to issue shares of stock—allowing for the sharing of ownership among different parties. Compared to incorporating, which permits a business owner to sell a stake in the ownership of the company, a sole proprietorship or partnership is generally owned only by those who manage the business.
Along with benefits, incorporation comes with obligations, including meeting government regulations, paying taxes, and keeping precise records. In a nutshell, incorporating a company is a good start for long-term success.
Advantages and Disadvantages of Incorporation
After knowing incorporation definition, here we have compiled several benefits of incorporating a company:
- Separate company assets and the private assets of the owners. In a limited company, liability is limited to the owners’ respective share of liability, and their personal assets are protected.
- Receive a tax-deductible pension for the owners who become employees at the company. Furthermore, it is relatively easy to acquire subsidies for the company.
- Allow for risk-taking and growth opportunities without putting shareholders, owners, and directors at risk of personal financial liability beyond their original investment in the company.
- Easy to sell or share a part of the ownership stake with different parties and remain the main owner of the company.
- May receive more favorable tax treatment than other business structures.
Also read: The Types of Companies in Indonesia
Additionally, it also comes with some drawbacks, as listed below:
- Reduced its flexibility compared to other structures as the company is subject to its bylaws and article of incorporation. The executives at incorporated companies may find it challenging to make major changes to the company’s strategic or operational plans. This happens because the business typically has a full board of directors responsible for overseeing its operations.
- The owner has extra obligations, such as preparing the annual accounts.
- Typically exposed to the risk of double taxation. The corporation and its shareholders are subject to tax on the same funds.
- Usually requires more time and effort to meet reporting, filing, and regulatory requirements. The complexity of accounting requires an accounting service since it will be a difficult task to take care of by the owners themselves.
Also read: 12 Pro Tips for Choosing Your Company Name
How to Incorporate a Business?
Now you know what is business incorporation meaning. Next, we’ll discuss about the process.
Incorporating a business consist of several steps. Here we have arranged the step especially to guide the business owners to register their corporate:
1. Filling and Submitting the Required Documents
Filling out the form to register your company is essential. Here’s a list of the necessary information you’ll need to provide on the form (each country may have different form filling):
- The name of the company. Make sure that your company’s name is unique and distinct from other companies.
- The physical location of the company
- The registered office address. Since it may have a different address from the physical office, the registered company address should also be informed. Besides, the location should be in the same state as the physical company.
- The specification of whether the company is a private, public, or unlimited entity
- The description of the company’s activities
- The approved article of the association
- Information regarding the company director (and public company secretary, if any)
- Evidence of liable capital, guarantee, or company shares
2. Selecting the Registered Agent and Paying Fee for Registration
A registered agent is a legal representative authorized to receive documents and mail on behalf of the company. It does not have to be the company’s owner as long as it resides in the same country where the company is established.
The registration fee differs based on how you register: via paper filling or web service, or whether you do the registration by yourself or engage with a consultant. In Indonesia, using the service of the notary public to notarize the company documents will be charged around 1.5% of the deed’s object value, which falls within the range of IDR 100 million to IDR 1 billion.
To register PMA company with a consultant in Indonesia, you will be charged around USD 2,500 (around IDR 37 million) to US 5,000 (around IDR 73 million).
3. Submitting the Memorandum of Association and Articles of Association
The memorandum of association specifies the intention to establish a company. It is stated that if the company is secured by shares, then it must be accompanied by evidence that all owners hold at least one share in the company.
Meanwhile, the articles of association indicate the rules in the company that are made by the owners. These rules are necessary and should undergo agreement from all of the owners.
Additionally, the corporate bylaws also needed to be drafted. This provides a comprehensive set of instructions on how to run a business including how the board of directors operates, how shares are issued, how compensation is structured, and what voting rights are.
4. Receiving the Certificate of Incorporation
After completing all the needed documents, the company will obtain the certificate of incorporation. This denotes that the company has fulfilled all legal requirements and is now officially registered.
Additional tasks for the owners after formalizing the company consist of creating a bank account, applying for an employer ID number, and filing federal taxes and annual reports.
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Other Things to Know about Company Incorporation
What is the difference between a private limited and an incorporated company?
The key difference between a limited company and an incorporated company is that a limited company is a business that limits the liability of its shareholders and investors. Meanwhile, an incorporated company is an independent legal entity whose owners are not liable for profits and losses. Only corporate with the tax that is required to be paid.
What is an example of incorporation?
Incorporation happens when a business owner decides to register their company legally and formally and make the business a separate legal entity. An example of a well-known incorporation is “Apple” company, which goes by the name “Apple Inc”. Another example is “Microsoft”, their full name is “Microsoft Corporation”.
An understanding of the meaning of company incorporation will assist you in a better understanding of the term. When considering whether or not to register your company, learning about the advantages and disadvantages can also be a good help to support your hesitation.
After reading the article about incorporation business definition, are you interested in formalizing your business? If so, you can chat us up to get started.