Businesses that want to sell shares of stock to investors, both private and public, must first become a corporation. The process of becoming a corporation is known as incorporation.
If you start a business using your own money, then you will be forming a sole proprietorship. You basically own the business yourself, and you are able to make all of the important decisions for the business on your own. You are also able to keep the profits. If three or more people put money together to start a business together, then it is a partnership. The people own the business, and all help with making decisions and sharing the business profits.
Corporations are completely different from sole proprietorships and partnerships. Corporations are basically their own “person”, so to speak. They register with the government and even get a federal tax ID number. They can own properties, sue people, and make contracts. A corporation has stock, which can be sold and bought in the stock exchange. The owners of the shares each have part ownership of the company.
There are certain laws that pertain to corporations. These are laws that help to determine the ways that corporations operate, how they are organized, and how the shareholders are protected. All corporations will have a board of directors. The shareholders of the company will choose board members each year. These board members will make the important decisions for the company. They will hire officers to help them make the decisions and determine company policy
Another reason that some companies incorporate is because it allows them to have limited liability. That is, in the event that the business gets sued, the corporation will pay the settlement. They can go out of business, but there is really not much more that can be done. As a sole proprietor, if you are sued, then you can lose your own personal assets as well.