Inc Corporation: Everything You Need to Know
Inc corporation is an abbreviated term of an incorporated business entity that operates as a corporation. 3 min read
2. Incorporated Companies
3. Characteristics of a Corporation
4. Advantages and Disadvantages of a Corporation
Inc corporation is an abbreviated term of an incorporated business entity that operates as a corporation. When you register your business, you can use either Inc. or Corporation in your company’s name. For example, you can call your company ABC Inc., ABC Incorporated, ABC Corporation, or ABC Corp to identify that your company operates as a corporation and not another type of business structure, i.e., LLC, LLP, etc.
Keep in mind that when it comes to the business structure, ongoing compliance obligations, limited liability protection, and tax set-up, there is no distinction between the terms Inc. and Corporation. However, these terms cannot be used interchangeably. Therefore, once you use the term “Corporation” in your business name, you cannot then begin using the term “Inc.” The term will need to remain consistent in all legal paperwork.
An incorporated company is essentially a corporation, which is viewed as a separate and distinct legal entity from its owners. When forming the corporation, the owner(s) will need to file the Articles of Incorporation with the Secretary of State. This document will contain information regarding the business, such as its name, location, business purpose, number and class of shares, board of director names/addresses, officer names/addresses, and the percentage of shares held by each board member and officer.
The shareholders of the company choose the board of directors. The board will have oversight into the significant business decisions, such as potential mergers, voting rights, selling of assets, etc. In turn, the board will hire a number of officers to oversee the daily operations of the business.
Characteristics of a Corporation
There are many unique characteristics of a corporation; with that said, there are similarities in the corporation’s characteristics with that of other business structures. Some of the characteristics include:
- The corporation’s shareholders cannot be held personally liable for the debts and obligations of the business
- Depending on how the corporation is taxed, it might need to pay double-taxation
- Unlike the Limited Liability Company (LLC), a corporation can continue operating if a shareholder dies or becomes incapacitated
Generally, shareholders cannot be held personally liable for the company’s debts. Therefore, their personal assets cannot be affected. There is always an exception to this rule, particularly if the shareholder engaged in illegal or fraudulent activity.
Depending on how the corporation is taxed, it might face double-taxation, particularly for those corporations that operate as C Corporations. For example, a C corporation will need to pay corporate income taxes on the business’s assets. Thereafter, any remaining revenue that is distributed as dividends to the shareholders will be subject to personal income tax rates at the personal tax level. If, however, the corporation operates as an S corporation, then the company will act as a pass-through tax entity, similar to the LLC. As such, the S corporation will pass through all assets, expenses, and losses to the shareholders who will then report it on their personal income tax return. The percentage to be reported is determined by the percentage of shares held.
Since corporations cost more to form, and have more corporate formalities, it is recommended that small businesses not incorporate unless they have the revenue to be able to do so. A lot of small companies are formed as LLCs until they are ready to convert into a corporation.
Advantages and Disadvantages of a Corporation
There are several advantages to operating as a corporation. While there are many advantages, there can be some drawbacks to forming a corporation. Depending on your short and long-term goals and objectives, you should consider all business structures before forming a corporation.
Some of the advantages include the ability to share stock and engage in income splitting to help reduce tax liability. While there are ways to reduce tax liability, if you operate as a C corporation, your company will be subject to double-taxation. However, you can choose to elect being taxed as an S corp to avoid such tax implications and instead operate as a pass-through tax entity. Some other drawbacks of a corporation, particularly compared to an LLC, is that the corporation has additional corporate formalities that must be followed, such as holding annual and periodic meetings, recording meeting minutes, and having restrictions on the number of owners (S corps can have only 100 shareholders).
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