Accounting For Dummies®, 4th Edition

8.3. Incorporating a Business

The law views a corporation as a real, live person. Like an adult, a corporation is treated as a distinct and independent individual who has rights and responsibilities. (A corporation can't be sent to jail, but its officers can be put in the slammer if they are convicted of using the corporate entity for carrying out fraud.) A corporation's "birth certificate" is the legal form that is filed with the Secretary of State of the state in which the corporation is created (incorporated). A corporation must have a legal name, of course, like an individual. Some names cannot be used, such as the State Department of Motor Vehicles; you need to consult a lawyer on this point.

Be careful what (and how) you sign If I sign a $10 million note payable to the bank as "John A. Tracy, President of Best-Selling Books, Inc.," then only the business (Best-Selling Books, Inc.) is liable for the debt. But if I also add my personal signature, "John A. Tracy," below my signature as president of the business, the bank can come after my personal assets in the event that the business can't pay the note payable. A good friend of mine once did this; only later did he learn of his legal exposure by signing as an individual. By signing a note payable as an individual, you put your personal and family assets at risk in the event the business is not able to pay the loan.

Just as a child is separate from his or her parents, a corporation is separate from its owners. The corporation ...