Definition of Corporation and Incorporation
A corporation is a separate legal entity from its owners, which means that it can enter into contracts, own assets, and sue or be sued in its own name. This separate legal status is achieved through the process of incorporation.
There are several types of corporations, including:
- C Corporation: A traditional corporation with multiple shareholders and the ability to issue stocks. C corporations are taxed as separate entities.
- S Corporation: A corporation that has elected to be taxed as a small business, with the profits and losses passing through to the shareholders and reported on their personal tax returns.
- Limited Liability Corporation (LLC): A hybrid business structure that combines the benefits of a corporation with those of a partnership or sole proprietorship. The owners of an LLC are not personally responsible for the debts and obligations of the business.
The key characteristics of a corporation include:
- Separate Legal Entity: A corporation is considered a separate legal entity from its owners and is recognized as such under the law.
- Limited Liability: The owners of a corporation, also known as shareholders, are typically only responsible for the amount of money they have invested in the company. This means that their personal assets are protected from the company’s debts and obligations.
- Transferable Stock: The ownership of a corporation is divided into shares of stock, which can be bought and sold by shareholders.
- Centralized Management: A corporation is typically managed by a board of directors and officers, who are responsible for making decisions and managing the day-to-day operations of the business.
- Perpetual Existence: A corporation has the potential to exist indefinitely, even if its owners change, as long as it remains in compliance with all relevant laws and regulations.
Incorporation refers to the process of forming a corporation, which involves obtaining a separate legal status as a corporation. This is typically accomplished by filing articles of incorporation with the relevant state government agency. The articles of incorporation serve as the legal foundation for the corporation, setting forth important information such as the corporation’s name, purpose, and the number of shares of stock that will be issued.
The purpose of incorporation is to provide the corporation with its own rights, privileges, and liabilities distinct from those of its owners. This separate legal status provides the owners of a corporation with limited liability protection, meaning that they are typically only responsible for the amount of money they have invested in the company.
The steps involved in incorporation typically include:
- Choose a State: The first step in incorporation is to choose the state in which to incorporate. This is typically the state in which the corporation will be primarily doing business.
- Choose a Business Name: The next step is to choose a name for the corporation that is available and in compliance with the naming rules of the state in which it will be incorporated.
- File Articles of Incorporation: The articles of incorporation must be filed with the relevant state government agency.
- Obtain any Required Licenses or Permits: Depending on the type of business and location, there may be additional licenses or permits that need to be obtained in order to legally operate the corporation.
- Establish Corporate Bylaws: Corporate bylaws set forth the rules and procedures for the corporation’s internal governance, including things like the responsibilities of officers and the process for electing directors.
- Hold Organizational Meetings: The final step in incorporation is to hold the initial organizational meetings of the corporation’s board of directors and shareholders, at which important decisions are made and the corporation is officially established.
Difference between Corporation and Incorporation
The main difference between a corporation and incorporation is that a corporation is a separate legal entity from its owners, while incorporation is the process of forming a corporation.
A corporation is characterized by limited liability for its owners, transferable stock, centralized management, and perpetual existence. Incorporation, on the other hand, is the process of obtaining a separate legal status as a corporation and establishing the corporation’s legal foundation, including the articles of incorporation.
Another key difference is that a corporation is taxed as a separate entity, while the owners of an S Corporation are taxed on the profits and losses of the corporation, which pass through to their personal tax returns. Additionally, the owners of a limited liability corporation (LLC) have the advantage of limited liability protection, which means that their personal assets are protected from the company’s debts and obligations.
While a corporation is a separate legal entity with its own rights and liabilities, incorporation is the process of forming that legal entity. Understanding the difference between a corporation and incorporation is important for individuals and businesses looking to form a corporation and protect their personal assets.
The difference between a corporation and incorporation is important for individuals and businesses to understand when considering the best structure for their business. A corporation is a separate legal entity with its own rights and liabilities, while incorporation is the process of forming that legal entity. A corporation offers limited liability protection for its owners, transferable stock, centralized management, and the potential for perpetual existence. The process of incorporation involves filing articles of incorporation, obtaining any required licenses or permits, establishing corporate bylaws, and holding organizational meetings. Understanding these differences is crucial for businesses seeking to protect their personal assets and ensure the success of their company.