Incorporation vs Corporation: Everything You Need to Know
Incorporation vs. corporation is a common comparison made by business owners as they decide which business entity will be the best option. 3 min read
2. What Is Incorporation?
3. Corporation vs. Incorporation
What Is a Corporation?
Incorporation vs. corporation is a common comparison made by business owners as they decide which business entity will be the best option. A corporation is a separate business entity that is granted specific rights by the law and is treated similarly to a person. Corporations can conduct business in their names, take legal action, and own property. Corporations can also grant shares, which are ownership interests in the business. These shares can also be inherited or sold. Corporations survive their owners, which means that in principle, they can exist without end.
The liability for business debt and other obligations is limited to the investment of each individual shareholder. Personal assets are not at risk unless a seller or lender requires them to guarantee repayment. The shareholders of a corporation are responsible to elect a board of directors, which will manage the operations of the business.
Corporations come with a few advantages:
- Can issue stock shares to appeal to investors
- Can split corporate income for lower tax liability
Some of the disadvantages of a corporation include:
- Restrictions on how many owners are allowed in S-corporations
- Required to hold meetings every year and keep the minutes
- The tax structure of a C-corporation requires payment of double taxes on any profits from the business
The word corporation refers to business groups, organizations, or institutions. Both business and nonprofit corporations will have charters, which include the business name and office address, along with the information about the board of directors. Nonprofit corporations typically state that all proceeds and earnings won't be paid to participants, officers, or directors, except in return for any business services rendered to the organization.
In order to gain tax-exempt status as a 501(c)(3) organization, a corporation must include a charitable purpose in its articles of organization. One example of a charitable purpose is the relief for those in poverty. The articles must outline that the purposes of the corporation are limited to charitable endeavors. Nonprofit corporations do not have shareholders. Instead, they could have members who issue votes for those on the board of directors. When nonprofit corporations do not have members, the business will choose its own board members.
What Is Incorporation?
The process of incorporation forms or creates a corporation. All organizers of a corporation are required to file the charter, also called the articles of organization, with the office in the state in which it will operate. This document, similar to a birth certificate of a corporation, will include the name of the corporation. The name has to be unique and distinctive from any other corporations within the state. It also cannot mislead potential investors or customers.
Additional provisions in the charter may include:
- The corporation's lifespan, which can be indefinite
- The corporation's business address
- Attestation that the purpose of the corporation is in line with all laws
- A description of the activities of the corporation
As soon as the owners of the corporation file the articles of organization, the business will be born. The exception to this rule is if a different effective date is specified in the articles.
Corporation vs. Incorporation
Corp. is an abbreviation for corporation while inc. is an abbreviation for incorporated. Both of these abbreviations are commonly used in the names of incorporated business entities. When registering a business as a corporation, the owners must use one of these abbreviations or words in the name. Corporations and incorporations have the same tax structure, limited liability, compliance rules, and legal structures. However, the two terms shouldn't be used interchangeably. After registering a business with either inc. or corp. in the name, the owners must continue to use the same abbreviation in all legal documents.
Both terms and abbreviations represent business entities that have been granted their own charters. The charter recognizes a corporation as its own legal entity with its own liabilities and privileges that are separate from its members' rights, liabilities, and privileges. One of the most critical features of both incorporations and corporations is limited liability. This means employees, directors, and shareholders will not be held personally responsible for any business debts.
If you need help with incorporation vs. corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.