What is Articles of Incorporation?
Articles of Incorporation is also known as a Certificate of Incorporation or Corporate Charter. These are legal documents filed with a government authority, usually at the state level, to officially establish the existence of a corporation. The articles typically outline essential information about the corporation. This includes its name, purpose, location, structure, and the number and type of stock authorized to issue.
Why is it important or used in Accounting?
Articles of Incorporation are crucial in accounting for several reasons:
- Legal Recognition: Filing Articles of Incorporation grants the corporation legal recognition as a distinct and separate entity from its owners. This separation is vital for accounting purposes, allowing the corporation to enter into contracts, own assets, and incur liabilities in its name.
- Corporate Structure: The articles define the corporate structure, specifying details such as the number of authorized shares and the classes of stock. This information is foundational for accounting processes, including share issuance and tracking.
- Liability Protection: One of the advantages of incorporation is the limited liability protection it affords to shareholders. Understanding the details outlined in the articles is essential for legal and accounting purposes, ensuring compliance with corporate governance and liability protection.
Advantages of Articles of Incorporation:
- Legal Clarity: Articles of Incorporation provide clear legal guidelines for the corporation’s structure, purpose, and governance. This reduces ambiguity and potential disputes.
- Limited Liability: Corporations offer limited liability protection to shareholders. This means their assets are generally protected from the company’s debts and liabilities.
- Access to Capital: The formal establishment of a corporation through the Articles of Incorporation makes it easier for the company to attract investment by issuing stock and demonstrating a clear legal framework.
Disadvantages of Articles of Incorporation:
- Complexity and Formality: Drafting and filing Articles of Incorporation can be a formal process that may require legal assistance. This formality can disadvantage small businesses seeking a simpler business structure.
- Regulatory Compliance: Corporations are subject to certain regulatory and reporting requirements, and failure to comply can result in penalties. This regulatory burden may be a disadvantage for some businesses.
- Costs: Filing Articles of Incorporation typically incur fees, and ongoing corporate compliance may involve additional costs. This can be a drawback for businesses with limited financial resources.
Example of Articles of Incorporation for a Wholesaler or Retailer Business:
Suppose a retailer decides to incorporate and files Certificate of Incorporation. The key elements in the Articles of Incorporation for this hypothetical retailer might include:
- Corporate Name: XYZ Electronics, Inc.
- Purpose: The corporation’s purpose is to engage in retail selling electronic goods.
- Location: The corporation’s principal office is at 123 Main Street, Cityville, State.
- Authorized Shares: 100,000 shares of common stock with a par value of $1 per share.
- Board of Directors: The corporation will have a board of directors responsible for overseeing the business.
- Duration: The duration of the corporation is perpetual.
These details, among others, would be outlined in the Certificate of Incorporation. Once filed and accepted by the relevant government authority, the corporation gains legal recognition, and these articles become a foundational document for legal and accounting purposes throughout the company’s existence.
How to register your business
- USA: See Stripe guide for registering your business in the US. You can also use Atlas to register startups in Delaware.
- Canada: You can register your business here