If you’re ready to start a business, it’s vital to understand what’s meant by “incorporation” or “corporation.” Although the words sound similar, there are fundamental differences in how they’re applied. We’ll break each term down and let you know how they affect your business.
Incorporation is the process you go through to form a legally separate business. It starts with your idea for a new venture and ends when your business is created as a separate legal entity. Here’s how it works:
- You decide to form a new business, specifically an S Corporation or a C Corporation.
- You find a unique name for your new business, together with a street and mailing address.
- You gather the information you will need to legally form your new venture, including name, address, Registered Agent, capital structure and incorporators.
- You include all of this information on a form that’s normally referred to as “Articles of Incorporation.”
- You file the form with your state’s business formation agency, typically the Secretary of State.
- The business formation agency creates your corporation and you start running it.
That’s the incorporation process.
A corporation is a specific type of business entity. It’s considered legally separate from its owners, employees and others, and exists as an entity in its own right. A corporation is created through the process of incorporation. Corporations in the U.S. are known as either S Corporations or C Corporations, and each provides different benefits to stakeholders.
The main difference: incorporation is the process you go through to create a corporation, which is a separate legal entity.
Corporations Are a “Separate Legal Entity”
The distinction of a corporation being legally separate from its owners and shareholders is an important one. The most important factor is that it shields its owners from personal liability for actions that the corporation takes. If a corporation is sued, then the assets it owns are at risk, but the personal assets of the owners are not.
Compare the Differences Between Incorporation and Corporation
|Creating a business||Incorporation is the process of forming a business in the first place.||A corporation is the outcome of creating a business through the incorporation process.|
|Business lifecycle||Takes place at the start of the lifecycle and is a necessary first stage in creating a corporation.||Exists indefinitely, unless the corporation goes out of business and is dissolved.|
|Liability protection||The incorporation process itself does not offer liability protection.||S Corporations and C Corporations are considered legally separate from their owners and shield personal liability.|
|Day-to-day activities||None. Incorporation is a one-time-only process.||Operate and run the business with revenue-generating activities.|
|Legal requirements||Gather together accurate information and file Articles of Incorporation with the state business creation body.||Create payroll; appoint employees and a board; hold an AGM, minute meetings, and others.|
Corporations Are Not Your Only Option
S Corporations and C Corporations do provide some advantages to specific types of entrepreneur, but they do require a lot of overhead to maintain, including:
- Payroll for employees
- Creation of a company charter
- Bylaws and minuted meetings
- Issuance of stock ownership certificates
- The requirement to hold an Annual General Meeting
- The requirement to appoint Officers
- The requirement for a Board of Directors
- Complex tax filings
In most cases, there’s a type of business that provides similar benefits to corporations without the administrative headaches — the limited liability company, or LLC. These types of businesses are quicker, easier and cheaper to create and maintain. It’s important to note that an LLC is not a type of corporation, but in many cases will meet your needs and also offers liability protection.
We have a complete set of state-by-state guides to forming a corporation and other guides for forming an LLC. They’re a great starting point for learning what’s best for your circumstances. We also have a Business Entity Quiz that helps you decide the type of business that’s best for you.