Only five percent of American businesses are corporations.
Even fewer can legally designate themselves as “incorporated.”
But is there any real benefit? Should your growing business consider changing its status for financial gains or legal protection?
Here’s everything you need to know about corporation vs incorporation.
Table of Contents
Defining a Corporation
Think of a corporation as the product of the incorporation process. A “corporation” is a designation given to businesses. Incorporation is the process an entity undergoes to become a corporation. There are many types of corporations. For example, charities and sports clubs can be corporations.
Usually, a corporation title is sought out when multiple shareholders want to come together to achieve a common goal or purpose. Your company secretary will likely be the point of contact for all legal and administrative tasks in regards to company designation.
As long as a co[poration is able to pay back its liabilities it’s able to keep its corporation title. Corporations usually serve as an umbrella that multiple brands fall under.
A corporation designation comes with more rules and responsibilities too. Each industry has its own set of regulations for corporations to follow. Corporations are taxed on their profits. But, stakeholders must also file income tax for the income they earned through the corporation.
Defining Incorporation
As we mentioned earlier, “incorporation” the legal process an entity undergoes to become a corporation.
Entities that are designated as corporations have some legal and financial benefits. First, the owners of a corporation are able to legally and financially separate themselves from the business.
For example, if a business is designated as an LLC, there is no legal or financial line between where the business ends and the owner begins. This means that if someone sues your business, they sue you. For obvious reasons, the designation can become problematic as a business or organization grows.
If you are unable to afford to run an LLC, you will have to dip into your personal assets to satisfy the debts you owe. But, if this happens to a corporation, financial institutions cannot claim any personal assets of the stakeholders or owners. They can only acquire the assets of the business entities involved with the corporation (or liquidate them).
Using Corporation vs Incorporation
If your corporation has been incorporated you can use “Inc.” in your business name. But, since incorporation is a legal designation, you can only use it if you have the legal paperwork to back it up. If you incorporate your cooperation you don’t necessarily need to add an “Inc.” to the business name.
The term “Corp.” should also only be used if your business is legally designated as a corporation. If you incorporate a business that uses the term “corp” in the name, you don’t need to change it to “inc” once it’s incorporated.
For tax purposes, there is no benefit to designating a business as a corporation vs incorporation. Since both types of businesses legally separate a business entity from its members.
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