What’s the Difference Between Corporation and Incorporation?
Thu | April 2022
When starting a business, it is essential to understand the distinction between incorporation and registration. Both are viable options for making your company legal. Learn how to tell the difference between incorporating or registering your business in simple terms. Outweigh advantages and disadvantages, consult with a financial expert, and pick the best option for your business!
Difference Between Corporation and Incorporation
Two main factors make registering and incorporating a business different, the legalities and liabilities involved. Registering your business means obtaining a business license to operate in your region legally. That's it-
Incorporating your business takes it a step further. It means you are taking action to separate yourself from your business, protecting your personal assets and your company name. Yes, we know it looks easy on paper, but as a business owner, you might get jumbled up in legal terms and technicalities, so move on to resolve all possible doubts and clear your way for success!
Registering Your Small Business
When you register your business, you take a vital step to protect it and make sure it can operate legally in your area. Registration allows the public to know who runs the company and prevents other entities from performing under the same entity.
This process usually takes little time. However, every state has different rules and could ask you for specific licenses depending on your business activity, so make sure your business complies with each state's requirements before registering. This is what you'll need to register your business:
A business name.
A business structure. You can pick the best one here.
Possible registration fees. This varies depending on the state, but costs usually fall under $300.
Annual renewal.
Incorporating Your Small Business
When you incorporate your business, you are creating a separate legal entity. But, most importantly, you are taking a huge step to separate your personal assets and protect them from any financial or legal risk your business could encounter.
Different business entities are suitable for incorporation, such as an LLC, a C-corp, or an S-corp. You can check out their, pros, and cons by reading: "The Essential Guide to Types of Business Ownership: From Startup to Established".
Incorporating your entity is a good idea if your business expands and you want to establish a set of responsibilities for shareholders and business owners. Shareholders will receive a fraction of the company's profits in dividends, but they'll also be entitled to pay their shares annually. This role is different from the one taken over by the company's owner or directors, that will be held accountable for day-to-day activities. In both cases, shareholders and owners will not be subjected to personal liability (except fraud cases).
Benefits of Incorporating a Business
Incorporating your small business offers many advantages that registration does not. The following are some of them:
1. Personal Liability Protection
Incorporation protects you and your business from legal and financial liabilities. As we previously stated, you and your business become separate entities when you incorporate. Therefore, if your company faces any legal charges or financial debt, your personal assets won't run the risk of foreclosure or seizure.
Owners of a corporation may only be liable for business losses and obligations up to their investment in the company. On the other hand, your personal debt or bankruptcy won't affect your business operations. It's a win-win situation for you and your business.
2. Income Tax Benefits
Separate legal entities means that your company's taxable income will be filed as an U.S. Corporation Income Tax Return. It also means it will have its own Federal Tax Identification Number.
In other words, even if you're the owner, you won't be personally responsible for reimbursing business taxes claimed by the government. Instead, your business and shareholders will be held accountable for the company's taxes.
For corporations, the federal income tax rate is lower than for individuals. Furthermore, businesses may be eligible for a number of tax breaks that are not available to individuals or partnerships.
3. Structure for Business Scalability
Sole proprietorships or partnerships don't let you issue stocks- it all falls on the hands of the owner or owners. On the other hand, when you incorporate your business, you are allowed to sell shares and raise money for the company. This is a great way to recruit investors who see future potential in your company. It's also a safer and more attractive option for new shareholders who don't want the personal liability.
4. Easier Access to Working Capital
One of the main advantages of incorporating your business is that your business will be more attractive to potential funders, investors, and venture capitalists. Incorporated businesses are typically the safest option because they minimize investment risk.
This is because, unlike sole proprietorships or partnerships, the company's worth doesn't just depend on its owners. Corporations can quickly transfer equity between shareholders. Corporations also diversify and allow different classes of stock.
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The Disadvantages of Incorporating a Business
1. You’ll Be Subject to Double Taxation
The downside to filing your corporate tax return is double taxation. First, your corporation will have to pay taxes on earnings as a business owner. Then you'll have to file your personal taxes; if you are a business owner and or shareholder, this means paying taxes on any salary or dividend you receive.
2. It’s More Costly Than Just Registering Your Business
Even if it's more beneficial to incorporate in the long term, the initial costs of establishing and maintaining a corporation are higher than just registering your business, not because of the initial fees that are not very high. But because of maintenance. You might have to hire an accountant and attorney to help you integrate and manage all the legal provisions and regulations.
3. You’ll Have to Keep up With Compliance Regulations and Formalities
The government regulates incorporated businesses to abide by all compliance, financial, and legal procedures. Keeping organized will benefit your business in the long term. But this also requires a long-standing commitment to keeping on top of records.
These are some of the formalities you'll have to turn in annually:
A minute count of shareholder and director meetings
Accurate banking records separate from the owner's funds.
Articles of Incorporation
Certificates of good standing
Non-disclosure agreements
We recommend that you talk to a trusted legal and financial expert before registering or incorporating your business.
Disclaimer: The content of this post has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. Consult with your tax, legal, and accounting advisor before engaging in any transaction.