When starting a business, you need to decide on the type of company formation. There are two main types: incorporation and corporation. Incorporation is also known as “To form” or “The act of forming,” while a corporation is also known as “An incorporated company.”
One of the most critical factors in deciding which one to select is whether you want your liability limited. A corporation offers this benefit by providing shareholders with limited liability. If an investor or shareholder of a company gets into legal trouble, their assets are not at risk; only that individual’s stock ownership is lost.
What Is a Corporation?
A corporation is a separate legal entity that has its own “personhood.” A corporation can sue and be sued, receive income, pay taxes, have assets of its own, borrow money, hire employees, consult with attorneys on various matters (i.e., contracts), etc.
A corporation doesn’t need to live forever, but it can continue to exist as long as the owners want it to stay in business. This is an essential distinction between a partnership and a corporation; it’s not always easy or cost-effective to end a partnership if one of the partners wants out.
A majority shareholder of a corporation typically controls all significant decisions regarding the company’s future direction – including whether or not there even is a future for the business. Investors usually have voting rights, which means voting on specific issues such as electing corporate directors and approving contracts.
Pros and cons
- Shareholders of a corporation have limited liability – they can lose their investment but not their assets.
- Investors may receive dividends on the company’s profits and can usually sell their stock for a gain or loss at any time.
- Corporations usually offer more than one class of stock to their investors, which means that some shares may be more desirable than others due to factors such as voting rights and guaranteed return on investment.
- Shareholders and directors of a corporation are protected from personal liability.
- A corporation can deduct certain expenses, such as health care premiums, on its income tax return.
- Corporations may increase their profits by reducing taxes through Tax Loss Carryforward.
- Most corporations must pay state and federal taxes.
- While some states exempt or limit the liability of shareholders in limited circumstances, all states allow corporations to purchase insurance that protects shareholders against damage claims and lawsuits brought by third parties resulting from negligence on the part of company employees, products sold, or services provided by a limited liability company (LLC) and its officers and members.
- Annual fees may be required for filing articles of incorporation with state agencies.
Types of corporations
There are also two main types of corporations: close (or subchapter S) and public.
1. Close Corporations
These are for smaller businesses, usually consisting of only about 20 shareholders, typically family members or another small group of people.
The most crucial distinction between a close corporation and a regular C Corporation is that close corporations can have no more than 35 shareholders, making them exempt from the extensive paperwork that goes into filing shareholder resolutions.
2. Public Corporations
Publicly held companies have initial shares sold to the general public through sale on secondary markets such as NASDAQ or over-the-counter trading. These types of corporations where stock is freely traded in public markets are hazardous because they must answer to their shareholders at all times under threats of being bought out by larger competitors.
This often results in lower-quality products and services to appease shareholders who want their money back.
What Is Incorporation?
Incorporation is where a legal business entity creates its own rules for being recognized under state law, such as a person or group of people. This set of laws are generally referred to as “bylaws.”
For other types of business corporations, these bylaws usually describe how often the corporation will hold shareholder meetings and what further details must be included in official company records – i.e., stock certificate numbers, names, and addresses of shareholders, etc., how much each share is worth (if applicable), etc.
Incorporation documents do not state any business purpose that the corporation may pursue (with some exceptions), nor do they give investors any rights or privileges beyond those stated within the text of its bylaws.
Pros and cons
- The state is required to provide the incorporators with the corporation’s name, which must be unique.
- Shareholders of an incorporated company have limited liability for its actions and debts.
- A corporation is taxed at lower rates than individuals or unincorporated businesses.
- It offers critical legal protections for corporate investors.
- A corporation can deduct certain expenses on personal tax returns (for example, health care premiums)
- The initial cost of incorporation may be expensive, depending on what state your company is based in.
- Publicly held companies are subject to more extensive regulatory laws and filing requirements than other types of business entities. This means that it must make available forms 10K and 10Q disclosing their financial results and comply with various regulatory filings.
Corporation vs. Incorporation
Corporation and incorporation do share some basic similarities, but there are also significant differences. Many people find it difficult to understand the difference between a corporation and incorporation because they both provide limited liability, which is considered one of their primary benefits.
However, the long-term goals and objectives of each type of business structure can be drastically different.
The distinction between a corporation and incorporation all comes down to the state in which your company is registered.
- A corporation refers specifically to public companies that have sold stock through initial public offerings (IPO).
- Incorporations refer to any company that has filed its articles of incorporation with a particular state’s Secretary of State or Department of Commerce.
- In general, corporations enjoy greater flexibility than incorporations when it comes to taxes, debt obligations, and shareholder control.
- Under the laws of most states, incorporations are required to have a board of directors in order to make legal decisions for the company. However, a corporation does not need a board in order to operate legally.
One common misperception about a corporation is that it is a bigger or more important entity than incorporation. This belief is often associated with the idea that only larger companies require an attorney during their formation process.
The truth is incorporation documents can be just as complex as corporate charters. For example, Delaware limited liability companies (LLCs) are known for being especially challenging in this regard due in large part to their extensive requirements regarding uniformity within articles of organization.
Key Differences between Corporation vs Incorporation
There are many differences between corporations and non-corporate business entities.
- Most notably, the corporation is subject to the principle of “corporate personhood”, which requires that shareholders, directors, and officers have limited liability for debts incurred by or crimes committed during their tenure. Incorporations do not enjoy this privilege.
- Additionally, a corporation enjoys perpetual existence unless it is dissolved or becomes bankrupt. Once incorporated, an entity does not require regular maintenance in order to stay active.
- With incorporations there is no such thing as corporate personhood; only actual people can be accused of committing a crime or being responsible for debts accrued by the company. This means that if someone sues your incorporation you will be unable to shield your personal assets from liability.
Taxes and fees
- Corporation also enjoys a more favorable treatment when it comes to taxes and filing fees.
- An incorporated entity is not required to pay corporate tax on the company’s earnings, but individual shareholders may have to report their dividends as taxable income depending on how much they earned.
In contrast, an unincorporated business entity must file a tax return that lists its total revenue, expenses, and net profit or loss. This can be helpful if you want your entity to pay taxes, but it does increase the risk of being personally liable for corporate debts.
Another primary difference between incorporations and corporations is their fees. Most states charge less for incorporation filings than they do for filing articles of incorporation; however, additional fees such as those required by the state’s Department of Transportation (if applicable) as well as county and local governments must still be taken into account when determining overall costs.
- Incorporation process requires the filing of articles of incorporation as well as other legal documents (e.g. operating agreement) with a state’s Secretary of State. This type of company is usually associated with smaller, newer businesses that need protection from lawsuits and loans taken out by creditors.
- Corporations generally file their own unique charter or articles of the organization after incorporating through a business entity registration service. Registration takes place at the state level and must be done in each state where a corporation conducts business. For example, an LLC operating in North Carolina must also register in any other state where it has offices or stores.
In addition to registering business entities, some incorporators specialize exclusively in creating corporate charters that meet all requirements for different types of businesses under varying jurisdictions.
In order words, if you want to register a corporation with the Secretary of State you need to follow different procedures than if you wanted an LLC or an LLP. By consulting with a business services company, you will ensure that your corporate charter is legally compliant and complete.
Business registration service
Incorporation services companies, also known as registered agent providers or even virtual office service providers, handle all aspects of incorporating your business as a law firm, including:
- filling out all the necessary forms with the state
- preparing minutes of the meeting where the entity is formed
- maintaining records for your company
- submitting annual reports to state authorities
- giving a legal advice
These services are usually offered for a yearly fee although some companies also charge an additional flat rate for each filing.
Before hiring incorporation services there are several factors you should consider :
- fees charged by different providers
- corporate name availability
- ease of use of the website
- customer support is available to help answer questions about your specific circumstances
- how long it takes them to deliver services once you have paid for them
- other considerations depending on what type of entity you want to register.
The benefits that hiring a reputable incorporator provides cannot be overstated: they will ensure that you comply with all legal requirements your state imposes on business entities. This type of service also typically includes customer support, but a legal process may be needed to make sure that you are complying with all federal and local laws.
Which entity to choose?
The following factors may influence the choice of entity you register :
- size and location of the company
- frequency of transactions
- number of owners
- liability for debts
- the amount secured by liens or encumbrances on property ownership interests (i.e., real estate)
- taxation issues.
The decision to incorporate should be made by weighing all factors equally rather than focusing solely on tax structure advantages because they can vary significantly depending on each individual situation.
Once incorporated, an entity should not be set aside until it is properly dissolved. State agencies require regular financial reports and fees to remain valid. For instance, incorporating an LLC through a company registration service will ensure that the business complies with all state laws and that all annual reports are filed on time.
The main purpose of incorporating is to separate your business from your personal assets. This means that creditors cannot go after your home, car, or other property for debts unless you have personally guaranteed them. The registration process also protects the company’s name by giving it trade name protection.
The next major benefit of registering an entity is that it allows owners to enter into contracts and borrow money in their separate names. Under common law, an individual was responsible for all liabilities incurred by the business unless he/she signed the contract as an agent of the corporation.
As discussed above, each type of registered business comes with its own advantages and disadvantages, which need to be weighed carefully when making this decision.