This post contains affiliate links, and we will be compensated if you buy after clicking on our links.
Read our review guidelines.
Are you in the process of making the complex decision of whether you should incorporate your business?
Looking to advise a business partner on what their best course of action may be faced with this dilemma?
Or are you simply looking to brush up on your business terminology? This article comparing incorporation vs. corporation is for you!
While intrinsically interconnected, there are some key differences between incorporation and corporation which are vital for entrepreneurs, business owners, and business professionals alike to understand.
In this article, I’ll examine the intricacies of each, as well as the advantages and disadvantages they may possess.
- Incorporation is the process by which a corporation is formed; there are numerous steps to this process.
- A corporation is a distinct legal entity from its owners and shareholders, with its own rights, responsibilities, and obligations.
- There are numerous advantages to incorporating, but there are also some important downsides that you will need to consider as well.
- There is no one-size-fits-all solution regarding whether or not you should incorporate – that decision is solely up to you.
Incorporation is the legal administrative process of forming a new business entity or corporation.
There are several reasons why a company may want to incorporate, including:
- Providing owners and investors limited liability, meaning their assets are kept separate from those of the company.
- Growth becomes easier to attain. An improved sense of credibility and legitimacy may attract more potential shareholders and partners.
- Financial dealings such as the transfer of funds and negotiating loans are made easier under the structure of corporate ownership.
- Stocks can be issued as a corporation, meaning ownership can be shared and expanded.
There are several steps to the incorporation process, the most important of which are:
- Deciding on a location out of which to operate. Different states have different rules and regulations regarding business administration, with some more relaxed/conducive to productivity than others. Examples of business-friendly states include Indiana and Colorado.
- Deciding on the business structure that works for the company. Important aspects to take into consideration when making this decision include what type of taxation and liability works best for the company
- Filing articles of incorporation. This is a document detailing the essential information about a corporation, such as its name, purpose, location, and details of shares.
A corporation is the result of incorporation. Once incorporated, a company becomes its own legal entity, with its own rights, responsibilities, and legal obligations.
Other key features include:
- Limited liability – Shareholders’ liability is limited to what they invest into the corporation, with personal assets protected by the ‘corporate veil’.
- Shared ownership via the issuing of shares – while some corporations can opt to be ‘closed corporations’ (meaning they don’t issue stock), larger corporations however usually have many shareholders – potentially thousands.
- Board of Directors – Shareholders appoint directors who are responsible for making key business decisions and ensuring the corporation is in keeping with all applicable regulations.
What’s the difference between incorporation and corporation?
Incorporation is the terminology for the legal process by which you create a corporate entity or business.
A corporation is the result of the Incorporation process – an entity distinct from its owners or shareholders.
Incorporating a company enables it to become a corporation, and therefore enjoy the benefits that come with this status.
However, it is important to recognize that some sacrifices may have to be made in incorporating your business.
In the next section, we’ll discuss both the advantages and disadvantages of incorporating to transform a company into a corporation.
Advantages & Disadvantages
While there are many advantages to incorporating a business so that it becomes a corporation, there are also downsides that should be considered.
Both the positives and negatives are as follows:
Separate legal entity
Formal decision making processes
Exploring Your Options
Now that you have a better grasp on the nuances of the relationship between incorporation and corporation, you should be in a better position to decide whether incorporating is the right option for your company.
While there are definite benefits and downsides related to both incorporation and corporation, only you are in the position to make the call for your company.
Congratulations on reaching the end of this article!
As you now know, incorporation and corporation are inherently connected; you can’t have one without the other.
Regardless of whether you are an entrepreneur or business owner looking to incorporate or a legal professional looking to brush up on the finer points of the distinction, your best judgment is the most important thing to use when deciding whether incorporation is the right thing for you or your client.
After all, no two companies are the same. Good luck with your business exploits.