While the two terms are often used interchangeably, there is a big difference between incorporation and corporation. Incorporation is the legal process of forming a new company, while a corporation is an actual business entity.
So, before you incorporate your business, it’s important to understand the difference between the two.
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- LegalZoom – Most popular online incorporation services
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What Is a Corporation?
Derived from “corpus,” the Latin term for “body,” a corporation is a company or group of people authorized to act as a single entity. This means that they are legally people within the means of the Equal Protection Clause of the Fourteenth Amendment to the U.S. Constitution and other laws.
However, there are some notable exceptions to this rule. For example, a corporation cannot be held liable for the torts (civil wrongs) of its employees or agents unless it expressly authorizes them. Additionally, a corporation has many of the same rights as a person, including the right to free speech and due process of law.
There are three types of corporations:
- C-Corporation: A standard corporation taxed on its income separately from its shareholders. This is the most common type of corporation.
- S-Corporation: A corporation that, for tax purposes, is treated as a partnership or sole proprietorship.
- B-Corporation: A type of corporation that uses its business model and social and environmental impact to create general public benefit.
What Is Incorporation?
Incorporation is the legal process of forming a new corporation. To incorporate, businesses file articles of incorporation with the state in which they plan to do business. These articles include the corporation’s name, its purpose, the names of its directors, and other information required by state law.
Once the articles are filed, the corporation is considered a legal entity separate from its owners. As a result, the owners are not personally liable for the debts and liabilities of the corporation. Incorporation also offers certain tax benefits and can make it easier to raise capital by selling shares of stock.
For these reasons, incorporation is a popular choice for businesses of all sizes.
The Basics of Incorporating Your Business
Now that you know the difference between incorporation and corporation, let’s take a look at the basics of incorporating your business.
1. Choose a business structure
The first step in incorporating your business is to choose a business structure. The most common structures are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Each type of business has its own benefits and drawbacks, so it’s important to choose the one that’s right for your business.
Sole proprietorships and partnerships are the simplest and most common types of businesses. These structures are relatively easy to set up and don’t require much paperwork. However, sole proprietorships and partnerships offer no personal liability protection, which means that the owners are personally responsible for the debts and liabilities of the business.
For this reason, these businesses are not a good choice for businesses with a high liability risk. Instead, they are best for businesses with low liability risks, such as consultants, freelance writers, and other service-based businesses.
LLCs are similar to sole proprietorships and partnerships but offer personal liability protection. This means that the owners are not personally responsible for the debts and liabilities of the business. LLCs are a good choice for businesses with a higher risk of liability, such as businesses that manufacture products.
Corporations are the most complex type of business structure. They offer personal liability protection and can be taxed on their income separately from their shareholders. However, corporations require more paperwork and have more stringent governance requirements. For these reasons, they are best for businesses looking for investors or planning to go public.
If you decide to register as a corporation, you will need to choose a business type. The most common types of corporations are C-corporations and S-corporations.
A C-corporation is the most common type of corporation. It is taxed on its income separately from its shareholders. C-corporations must have a board of directors and can have an unlimited number of shareholders. They can also issue different stock types, including common and preferred stock. Preferred shareholders have priority over common shareholders when it comes to receiving dividends and assets in the event of a liquidation. C-corporations are also subject to double taxation, meaning that they are taxed on their profits first and then their shareholders are taxed on the dividends they receive. While this can be seen as a drawback, it also means that C-corporations have greater flexibility regarding how they can use their profits.
S-corporations are similar to C-corporations but are taxed differently. S-corporations are not taxed on their income; their shareholders are taxed on their share of the corporation’s profits. S-corporations can have a maximum of 100 shareholders and can only issue one type of stock. Because of these limitations, S-corporations are not a good choice for businesses looking to raise capital by selling shares of stock.
2. Choose a business name
Once you’ve chosen a business structure, you need to choose a name for your business. The name you choose will be used on all of your incorporation documents and will be the name under which your business is registered with the government.
When choosing a name for your business, remember a few things:
- You want to choose a unique name that will be easy for people to remember. Shopify’s business name generator can help you find a unique and available business name.
- The name you choose must be available. To find out whether it is or not, you can search the business name database of your state or local government.
- You want to ensure the name you choose complies with your state’s naming rules. For example, some states require that corporate names include the word “Corporation,” “Incorporated,” or “Limited.”
- Your website’s domain name is available. If the “.com” version is taken, there are several other domain name extensions you can use, but whether or not that is a good idea will depend on your business type.
3. File the necessary paperwork
The next step is to file the necessary paperwork with your state government. This will vary depending on the type of business you are forming and the state you are incorporating.
If you are forming a corporation, you must file Articles of Incorporation (or a similar document) with your state government. This document will include your business name, address, and the names of your incorporators (the people forming the corporation).
If you register the business in a different state from the one you live in, you will need to file for a Certificate of Authority (or a similar document) with the state you are incorporating. This will allow you to do business in that state.
4. Create corporate bylaws
The next step is to create corporate bylaws. Bylaws are rules that govern how a corporation will be run. They include things like the number of directors on the board, how often board meetings will be held, and what type of stock will be issued.
Bylaws are not required by law, but they are a good idea. They provide a framework for running the corporation and can help prevent disagreements among shareholders.
Creating corporate bylaws is relatively simple. You can find templates online or hire an attorney to help you create them.
5. Find legal and financial assistance
The final step is to find legal and financial assistance. You will need to have an attorney draft your articles of incorporation and bylaws, and you will need to find an accountant to help you with your taxes.
You may also consider hiring a business consultant to help you get started. A business consultant can provide valuable advice on everything from marketing to financial planning.
You’ll also want to set up a business bank account and obtain business insurance. You can do this with just about any bank, but neo-banks like Brex and Divvy offer special products and services for businesses.
Brex, for example, offers a corporate card with no personal liability, which can be helpful if you have employees who travel or make purchases on behalf of the company. Divvy offers a spend management platform that helps businesses track and control their spending.
Both Brex and Divvy offer free trials, so it’s worth considering them if you’re looking for a business bank account.
3 Tools for Incorporating Your Business
If you plan on incorporating your business, the steps above will give you a general idea of what you need to do. However, there are a few tools that can make the process easier.
Wolters Kluwer Incorporation Wizard Tool
The Incorporation Wizard Tool from Wolters Kluwer can help you select the right business entity for your company. It is a free online tool that you can use to compare the features of different business entities.
The tool asks you a series of six questions about your business, such as the number of owners, the type of business, and your goals for the company. It then provides a list of business entity options best suited for your company.
Shopify’s Business Name Generator
The Shopify Business Name Generator is a free tool that can help you find a name for your business. It generates names by combining words related to your business, such as the type of business, location, and keywords.
The generator also checks to see if the domain name is available and provides suggested alternatives if it is not.
Trusted by over 400,000 users nationwide, LegalZoom is the holy grail when it comes to incorporating your business. They offer a wide range of services, from filing your articles of incorporation to creating corporate bylaws.
They also have a team of attorneys and accountants on staff who can answer any questions you have about incorporating your business. Best of all, their services are reasonably priced.
And getting started is incredibly simple. Just enter basic information about your business, and they’ll take it from there.
4 Tricks for Incorporating Your Business
Especially for first-time business owners, the process of incorporating your business can be daunting. Since most of these concepts aren’t discussed in school, it’s important to do your research and seek out resources that can help you through the process.
Here are four tricks for incorporating your business.
1. You might not need to incorporate to enjoy the same tax benefits.
In many cases, filing as an LLC is a better option than incorporating your business. This is because LLCs are not subject to the same double taxation that C Corporations are.
Double taxation occurs when a business is taxed on its profits, and then the shareholders are taxed again on the dividends they receive. This doesn’t happen with LLCs, which means you can avoid paying taxes twice on the same income.
When you form an LLC, you must choose how your LLC will be taxed. You can elect to have your LLC taxed as a sole proprietorship, partnership, S corporation, or C corporation. If you elect to have your LLC taxed as an S corporation, you must file IRS Form 2553.
The main benefit of doing this is that it allows you to avoid paying self-employment tax on your LLC’s income. This can save you significant money, especially if your business is profitable.
2. You should probably file in a different state than where you live.
One of the benefits of incorporation is that it allows you to choose the state in which you want to incorporate. And in most cases, it makes sense to incorporate in a state other than the one in which you live.
This is because some states have more favorable tax laws for businesses, and others have fewer requirements for businesses to comply with.
For example, Delaware is a popular state for incorporation because it has very favorable tax laws for businesses. And Nevada is popular because it doesn’t have a corporate income tax. Wyoming is another popular option because it doesn’t have a personal income tax.
If you do this, you’ll still need to register your business in the state in which you live as a foreign entity. But you won’t be tied to this state should you decide to move your business elsewhere.
You can also choose to incorporate in a foreign country, such as the Cayman Islands or Bermuda. However, this is typically only done by large businesses because it can be complicated and expensive.
3. You’ll need to file annual reports and pay fees.
In most states, businesses are required to file annual reports and pay fees. These fees vary from state to state, but they’re typically not very expensive.
An annual report is simply a form you must fill out and submit to the state where you’re incorporated. It includes basic information about your business, such as your address, the names of your officers and directors, and your registered agent.
Your registered agent is the person who receives legal documents on behalf of your corporation. This can be someone you know, or you can hire a professional service to act as your registered agent.
You’ll also need to pay an annual fee to the state in which you’re incorporated. This fee is typically very small, and it’s often less than $100.
In some states, you might also be required to file a biennial report. This is simply a report that must be filed every two years, and it includes information about your business that has changed since your last annual report.
Finally, you’ll need to keep your corporate records up to date. This includes keeping track of your shareholders, directors, and officers. You should also keep minutes of your board meetings and shareholder meetings.
Keeping good corporate records is important because it helps prove that you comply with the law. It also makes it easier to resolve disputes that might arise.
4. You’ll need to follow certain rules and regulations.
As a corporation, you’ll need to follow certain rules and regulations. For example, you’ll need to have board meetings and keep track of these meetings.
You’ll also need to issue stock certificates to your shareholders. And you’ll need to keep track of your corporate records, such as your articles of incorporation, bylaws, and minutes of meetings.
Failure to comply with these rules and regulations can result in fines or even the dissolution of your corporation.
What to Do Next
So those are the basics of incorporation vs. corporation. As you can see, there are some significant benefits to incorporating your business. But there are also some drawbacks you should be aware of. Ultimately, deciding whether to incorporate is up to you and what’s best for your business.
If you’re unsure, we recommend talking to a business attorney or accountant who can help you weigh the pros and cons of incorporation. They can also help you determine which type of entity is right for your business.