Corp vs Inc: Everything You Need to Know
Corp vs. inc is a common source of confusion among individuals setting up a business that protects personal assets. Corp. stands for corporation, and inc.3 min read
2. Corporation vs. LLC
3. S Corporations vs. C Corporations Tax Issues
Corp vs. inc is a common source of confusion among individuals setting up a business that protects personal assets. Corp. stands for corporation, and inc. means incorporated. It really doesn’t matter which extension term is preferred by the founders at the time of incorporation. Both provide the same tax structure and limited liability for owners (called shareholders), both have the same compliance procedures, and both receive recognition as a legally incorporated entity in all business dealings.
Using corp. or inc. does matter, however, after the founders determine which extension they want to use in their name. Once the entity is established through their state’s incorporation process, the two terms cannot legally be used interchangeably unless a request is made for a formal name change.
Choosing a Corporate Business Structure
The two most important factors driving the decision as to how to set up a business as a corporation usually comes down to the extent of personal liability of the business’s owners and how the profits (or losses) of the business will be taxed. Many businesses begin as a sole proprietorship or partnership. The owners are the business. They are responsible for any liability the business incurs, and all income (or loss of income) generated by the business is viewed as personal income (“pass-through taxation”) by the IRS and state tax agencies.
When the founders of a business wish to evolve from a sole proprietorship or partnership, or establish the business from the outset in order to protect their personal assets from those of the business, they must elect to create an entity that is separate in the eyes of the government (state and local). This requires that the business be formally incorporated in a state of the founder’s choice.
Corporation vs. LLC
Filings are made at the state level, and every state has its own rules and regulations for how a business must establish, operate, and identify itself. The initial decision to incorporate comes down to whether to file as a corporation or a limited liability corporation (LLC).
- Limited Liability Corporation: Owners of an LLC are called members and, as is the case with a corporation, their personal assets are protected from any liability the business incurs. Members can determine whether they will be involved in the daily operation of the business or whether they will hire managers to run the company. However, income (or loss) from the business is still taxed in a similar manner to a sole proprietorship or partnership.
- Corporation: Shareholders control a corporation. Shareholders are not personally liable for any damages attributed to a corporation. All business is conducted under its legal name. Whether that name includes the extension corp. or inc. is determined at the time it is incorporated by its founder or by the regulations of the state of incorporation. A corporation may own property, sue or be sued, and conduct business just like an individual. It can raise funds through the sale of stock to investors, and its existence is perpetual.
S Corporations vs. C Corporations Tax Issues
The different method by which the profits of an S corporation and C corporation are levied is just one feature, albeit an important one, which distinguishes these forms of corporate structure.
- S Corporation: There are advantages to filing as an S corporation. In terms of taxation, an S corporation is treated as a “pass-through” tax entity, just like an LLC, by state and federal tax authorities. The choice between becoming an S corporation or an LLC is one faced most often by single or very small business owners. For them, the difference between an S corporation and LCC generally comes down to the way Medicare and Social Security taxes are assessed.
- C Corporation: Establishing a business as a C corporation has benefits. When it comes to taxes, C corporation profits are assessed as if it is an individual entity. After paying its taxes, a corporation then distributes any remaining profit among its shareholders in the form of dividends. Those shareholders must, in turn, count those dividends as income on their personal tax filings. This is known as “double taxation” and is a major reason owners of small businesses prefer to exist as an S corporation.
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