Thinking about starting a business and unsure whether to incorporate or form a corporation? It’s important to understand the key differences between the two. Incorporations and corporations might sound similar, but they differ in structure, taxation, and more. Let’s break down what sets Inc. and Corp. apart so you can make an informed decision.
What is a Corporation?
A corporation is a distinct type of business entity that operates separately from its owners, who are known as shareholders or stockholders. Unlike other business forms, a corporation can enter into contracts, own property, and conduct business in its own name, independent of the individuals who own it. To establish a corporation, you must file articles of incorporation with the state where the business will operate.
One of the biggest advantages of forming a corporation is the limited liability protection it offers to its shareholders. This means that if the corporation faces debts or legal issues, the personal assets of the shareholders are generally safeguarded. Additionally, corporations enjoy perpetual existence, meaning they can continue to operate even if ownership changes or key individuals leave the company.
What do you mean by Incorporation of a business?
Incorporation refers to the legal process of forming a new corporation, which is a type of business entity that is separate from its owners. When you incorporate a business, you create a legal entity that can own property, enter into contracts, and conduct business independently of its shareholders (the owners).
Incorporation involves filing certain documents, typically called “articles of incorporation” or “certificate of incorporation,” with the appropriate state authorities. These documents outline key details about the corporation, such as its name, purpose, the number of shares it is authorized to issue, and the names of its initial directors.
Difference between Inc vs Corp
| Feature | Inc. | Corp. |
| Meaning | Incorporated | Corporation |
| Definition | Indicates a business is a legal entity separate from its owners | Refers to a type of business structure that is a legal entity separate from its owners |
| Usage | Often used as an abbreviation after the company name (e.g., Apple Inc.) | Can be used as an abbreviation after the company name (e.g., Microsoft Corp.) or as a standalone term |
| Legal Status | Indicates the business has undergone the incorporation process | Refers to the legal structure of the business |
| Choice | Can be used interchangeably with Corp. in most cases | Can be used as an alternative to Inc. |
How to incorporate a business?
Incorporating a business involves several steps, each designed to establish the company as a separate legal entity. Here’s a step-by-step guide on how to incorporate a business:
1. Choose a Business Name
- Select a unique name that complies with your state’s naming regulations. The name must typically include a legal ending, such as “Inc.,” “Corporation,” or “Ltd.,” to indicate that it is incorporated.
- Check availability by searching your state’s business name database and ensure the name isn’t already trademarked by another company.
2. Decide on a Business Structure
- Choose the type of corporation you want to form, such as a C Corporation, S Corporation, or a Nonprofit Corporation. Each type has different tax implications and operational requirements.
3. Appoint Directors
- Appoint the initial board of directors who will oversee the corporation’s operations. Directors are responsible for making major decisions and guiding the company’s overall direction.
4. File Articles of Incorporation
- Prepare and file the articles of incorporation with the state’s business filing agency, usually the Secretary of State. This document typically includes:
- The corporation’s name and address
- The purpose of the corporation
- The name and address of the registered agent (a person or entity that will receive legal documents on behalf of the corporation)
- The names and addresses of the initial directors
- The number of shares the corporation is authorized to issue
5. Create Corporate Bylaws
- Draft corporate bylaws, which outline the internal rules and procedures for the corporation, including how meetings are conducted, how directors are elected, and how records are maintained. Bylaws are not filed with the state but are essential for internal governance.
6. Hold the First Board Meeting
- Conduct the first meeting of the board of directors to adopt the bylaws, appoint officers (e.g., CEO, CFO), authorize the issuance of stock, and take other essential organizational actions.
7. Issue Stock Certificates
- Issue stock certificates to the initial shareholders, representing their ownership in the corporation. This step formalizes the ownership structure and can be critical for raising capital.
8. Obtain Necessary Licenses and Permits
- Depending on your industry and location, you may need to obtain specific business licenses and permits to operate legally.
9. Apply for an Employer Identification Number (EIN)
- Obtain an EIN from the IRS, which serves as the corporation’s tax ID number. This number is required for tax filing, hiring employees, and opening a corporate bank account.
10. Register for State and Local Taxes
- Register with your state’s tax agency for any necessary state taxes, such as sales tax or employment tax. Depending on your location, you may also need to register for local taxes.
11. Comply with Ongoing Requirements
- After incorporation, you’ll need to comply with ongoing state and federal requirements, such as filing annual reports, holding regular board meetings, maintaining corporate records, and filing taxes.
12. Open a Corporate Bank Account
- Open a separate bank account for the corporation to keep business finances distinct from personal finances. This is important for maintaining limited liability protection.
Frequently Asked Questions
What are the benefits of forming a corporation?
Forming a corporation offers several benefits, including limited liability protection for its owners and easier access to capital through the issuance of stock.
How do you establish a corporation?
Establishing a corporation usually involves submitting the necessary paperwork to the appropriate state or federal authorities, obtaining a corporate tax ID, and drafting corporate bylaws.
Are there any costs involved in setting up a corporation?
Yes, there are typically fees associated with filing the necessary documents to establish a corporation. You can choose OnDemand International for a detailed breakdown of the costs involved.
What are the tax considerations when forming a corporation? Forming a corporation comes with tax considerations. Corporations are required to pay federal and state taxes, and may also face additional taxes, such as excise taxes. For more details, you can explore resources provided by OnDemand International.
