Gavin Howe
Understanding the difference between corporate and incorporation law is essential for anyone starting a business. In simple terms, a corporation is a legal entity that is given certain rights, and incorporation is the process of forming that entity. Corporations are created to run the day-to-day operations of a business and apply fiscal strategies for growth and profit. Incorporation is the first step in forming a corporation, and it involves a series of legal steps that result in a business structure that protects the owners and shareholders.
| Characteristics | Values |
|---|---|
| Definition | Incorporation is the process of forming a corporation. |
| Legal entity | A corporation is a legal entity. |
| Ownership | Corporations have tiers of ownership. |
| Management | Corporations have more management requirements than LLCs. |
| Liability | Corporations have limited liability. |
| Taxation | Corporations are subject to corporate taxation. |
| Formation | Corporations are formed by filing Articles of Incorporation. |
| Abbreviation | "Inc." is an abbreviation for "Incorporated". |
| Life | A corporation has a life beyond its founders. |
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What You'll Learn
State laws and incorporation
State laws play a pivotal role in the incorporation process, influencing the legal framework that a business must follow. Each state has its own set of corporate laws, and the state of incorporation determines the specific laws that a company must abide by, even when operating in other states. This includes compliance with corporate governance rules, shareholder rights, fiduciary duties, and available legal remedies.
The process of incorporation involves filing the Articles of Incorporation with the state. These legal documents officially form the business as a legal entity recognised by the state. They outline crucial details such as the business name, type of business, and management structure. The requirements for these articles vary from state to state, and it is essential to understand the specific laws of your state to ensure correct filing. For instance, some states require multiple registrations, while others only need a single incorporator.
After incorporation, businesses generally need to obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS). This number is essential for tax purposes and allows the corporation to file income tax and corporate tax returns. Corporations must also comply with state and federal record-keeping laws, maintain good records of their business activities, and may need business licenses from the state or local government. Additionally, some states require ongoing reporting, such as annual reports or other periodic filings.
When choosing a state of incorporation, businesses should consider factors beyond just tax obligations and filing requirements. The legal protections offered, compliance costs, and flexibility in structuring corporate bylaws, issuing stock, and managing internal disputes vary across states. For example, Delaware is known for its business-friendly laws, allowing a single individual to act as the sole officer, director, and shareholder. In contrast, incorporating in your home state provides benefits such as easier access to local attorneys familiar with local laws and geographical convenience.
In summary, state laws and incorporation are intricately linked, with the state of incorporation dictating the legal framework that a business must operate within. The specific requirements, protections, and benefits vary across states, so it is essential to understand the laws of your desired state of incorporation to ensure compliance and make informed decisions about your business structure.
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The legal entity vs the process of forming it
A corporation is a legal entity that is given certain rights, meaning it is treated as a person under the law. It is a group of individuals legally recognised as a single entity. Under US law, corporations are considered "people" for many legal purposes, including the Equal Protection Clause of the Fourteenth Amendment.
Corporations can sue, be sued, enter into contracts, and own property. They also enjoy many of the same legal rights as individuals, such as freedom of speech and due process. As a separate legal entity, a corporation has a life beyond its founders and can survive changes in ownership or the deaths of shareholders.
Incorporation, on the other hand, refers to the process of forming a corporation. It is a series of legal steps and the result is a business structure that protects both the owners and shareholders. It is the first part of a legal course of action that leads to registering a business as a corporate entity. The act of incorporation separates the business from the owners, safeguarding them from any financial liabilities.
Incorporation provides a business with legal rights and responsibilities, such as limited liability protection, the capacity to build equity, and a structure for properly operating a business. During incorporation, businesses align with state-specific legal requirements, set up their foundational legal documents, and define their operational boundaries. This inaugural engagement with the law ensures the new corporation is anchored on a robust legal foundation, positioning it to adeptly tackle future legal intricacies and challenges.
The process of incorporation has a definitive start and endpoint. It begins when a certificate of incorporation is issued and ends once the corporation is formed. The act of incorporation does not merely involve filing necessary documents, but is a series of methodical and strategic actions that a business undergoes to attain legal recognition.
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The benefits of incorporation
Incorporation is the legal process of forming a corporation, a separate legal entity from its owners. It involves changing ownership so that the business is separate from its shareholders and is no longer a sole proprietorship.
There are several benefits to incorporation, including:
Limited Liability Protection
Incorporation offers limited liability protection, meaning that owners are typically not personally responsible for business debts. This creates a solid barrier between personal assets and legal claims against the business.
Tax Advantages
Incorporation can provide tax advantages, such as tax breaks and deductions, including writing off items like health insurance premiums and savings on self-employment taxes. Corporations can also raise capital by selling shares, providing flexibility in adding owners or changing stakeholders.
Enhanced Credibility
Incorporating a business bolsters credibility and may help attract new customers and partners.
Perpetual Existence
Incorporation provides perpetual existence, meaning the business can continue even if ownership or management changes.
Easier Access to Capital
Incorporation can provide easier access to capital, making it simpler for investors to infuse capital into the company.
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Corporate structure and longevity
In terms of structure, a corporation has tiers of ownership and management defined by statute. Shareholders elect a board of directors to manage the corporation, and they hold limited liability, protecting their personal assets in the event of financial setbacks. The corporation itself is managed according to its articles of incorporation and bylaws, which may include requirements such as annual shareholder meetings and directors' meetings.
Longevity in a business context is relative, varying across industries. Some industries, such as professional services, private banking, insurance, and luxury goods, tend towards longer time frames due to the importance of customer trust. In contrast, industries like technology and fashion experience faster change and lower barriers to entry.
To achieve longevity, corporations must navigate the "innovator's dilemma" by competing in mature businesses while exploring new technologies and business models. This involves aligning the organisation with the right strategy, people, structure, metrics, and culture. Ambidextrous leaders, like Shigetaka Komori of Fujifilm, successfully balance running mature businesses while leveraging corporate assets to explore new areas.
Additionally, prioritising critical growth initiatives, advancing strategic planning, and fostering a culture of strategic alignment contribute to longevity. Western Union, for example, regained its focus under First Data by concentrating on its money transfer product, achieving double-digit growth.
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Compliance and tax treatment
Incorporation refers to the legal process of forming a corporation, which is a legal entity that is treated as a person under the law. This distinction is important for legal and operational clarity. For instance, a business gains legal status and receives protections only after incorporation. This also means that corporate tax obligations begin once the incorporation process is complete and the business exists as a separate entity.
In the US, corporations must file Form 8806 with the IRS to report an acquisition of control or substantial change in capital structure. Additionally, certain large businesses and international corporations are required to electronically file their Forms 1120 and 1120-S. Other corporations may do so voluntarily.
The process of incorporation also impacts tax treatment and compliance for businesses. For example, an LLC with only one member is treated as a disregarded entity for tax purposes, and its income is taxed as part of the owner's personal income tax. However, an LLC can elect to be treated as a corporation for tax purposes by filing Form 8832. If this election is made, the LLC must then file Form 1120, the same form that corporations are required to file.
Compliance outsourcing can be a beneficial strategy for businesses to ensure they meet their compliance requirements in a cost-effective and timely manner. This can include working with federal or state tax authorities and planning for transactions. Additionally, technology-powered approaches can help businesses navigate change, simplify complexity, and enhance compliance through data extraction and analysis. Compliance can also be improved through the use of collaborative technology platforms that provide insights and support to tax teams. Furthermore, the IRS has initiatives in place to improve tax compliance by corporations, such as the Large Corporate Compliance (LCC) program, which uses data analytics to identify large corporate taxpayers for audits.
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Frequently asked questions
A corporation is a legal business entity formed to conduct business, offering limited liability to its shareholders. Corporations are treated as ['people' under the law] and can sue, be sued, enter into contracts, and own property.
Incorporation is the process of legally establishing a corporation. It involves filing a certificate (or articles) of incorporation, naming directors, and paying fees.
A corporation is the entity itself, while incorporation is the act of creating that entity.
Incorporation offers limited liability, perpetual existence, and easier access to capital. It also unlocks potential tax advantages and makes it easier to raise capital by issuing shares.
There are immediate financial outlays involved in incorporation, including state filing fees and potential charges for expert consultations. There is also a substantial time commitment involved.
