Inc vs Corporation: Everything You Need to Know
Inc. vs corporation is one topic that many entrepreneurs would like to learn more about. 3 min read
2. What is Incorporation?
Inc. vs corporation is one topic that many entrepreneurs would like to learn more about. A corporation refers to a common type of business structure while Inc. is the abbreviation for incorporated, which refers to the process of establishing a corporation. Here is some information about the key differences and similarities between corporation and Inc.
What is a Corporation?
A corporation is able to own property, face lawsuits, file lawsuits, and conduct business on its own behalf.
Ownership interests for a corporation are referred to as shares, and these can be inherited, sold, or given away. The corporation is able to exist forever and continues to live even after the death of its owners.
The liability of shareholders for business obligations is limited to the extent of their investment. The personal assets of the shareholders are not at risk unless the seller or lender requires them for the payment of debts.
The corporation is managed by a board of directors, who are elected by the shareholders.
C corporations are considered separate entities when it comes to taxation while an S corporation is considered a "pass-through."
Both types of corporations are subject to "double taxation" in the event that the corporate profits are distributed to shareholders as dividends. C corporations will the taxes on their profits at the entity level and then at the individual level of the owners, as the owners receive the profits as dividends. This results in a double tax.
Corporations feature a set management structure. The directors are responsible for making significant business decisions while the officers have the responsibility of running the business on a day-to-day basis.
The ownership is considered separate from control in a corporation.
The shareholders are the owners of a corporation. However, shareholders only hold the right to choose the board of directors and vote on business decisions that will have an impact on their ownership rights.
While the limitations on the rights of shareholders management are true for most types of corporations, there is a type of corporation that allows the members to have direct control of the corporation. This type of corporation is referred to as a close corporation.
The close corporation is not allowed in every state. In the states in which the close corporation is allowed, there are limits on the number of shareholders as well as the ability of the stock to be transferred.
Corporations often find it easier to attract investors due to the split between management and ownership. There are many venture capitalists who would rather invest in a corporation than in other forms of business.
It is easy to offer stock options with a corporation. This is considered a key way of attracting talent for a business.
It is also fairly easy for a corporation to get bank financing. This factor is particularly relevant and essential for capital intensive businesses.
The distributions during the existence of a corporation are based on the percentage or number of shares owned. For example, a shareholder who has 10 percent of corporation share will receive $100 if there is a dividend of $1,000.
Allocation of both profits and losses mainly depends on the corporation type. When it comes to a regular corporation, no profits are allocated to the shareholders. The corporation pays its own taxes. In an S corporation, the income and losses are allocated to the owners based on their percentage ownership.
What is Incorporation?
Incorporation refers to the process of creating a corporation. The organizers need to file the articles of incorporation with the corporation's office. The articles of incorporation is also referred to as the charter.
The "birth certificate of the corporation" needs to fulfill the following:
- The birth certificate must identify the name of the corporation.
- The name of the corporation needs to be distinct from the names of other corporations in the same state.
- The name cannot be misleading.
Other charter provisions will include the life span of the corporation, the address of the main office, and a description of the corporation's intended business and activities.
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