Corporation vs. IncorporationDifferences You Need to Know Between the Two!

Lisa Borga

Date Published: May 2, 2022

Corporation and incorporation are related terms, but they do have different meanings.

Incorporation is the process of registering your business with the state to establish it as its own legal entity.

A corporation is the type of business that is created after the incorporation process is complete.

Understanding Corporations and Incorporation

For investors or those people who intend to operate a business, it’s a good idea to understand the difference between the terms corporation and incorporation.

The terms do have different meanings.

Corporation

corporation

A corporation is a legal entity that is formed by shareholders to operate a business or govern an organization.

The shareholders run the corporation through their shares in the business.

There are different types of corporations.

They can be set up to operate as a business, a charity corporation, or even to govern sports organizations.

When people talk about corporations, they are often just referring to a large business or organization, whether or not it is actually a corporation.

Corporations are formed by shareholders for a common purpose, whether to run a charity, a business, or for the purpose of governing another type of organization.

Incorporation

Incorporating a Business

Incorporation is actually a process.

It is the process of forming a corporation, which accounts for the similar-sounding terms.

Incorporation involves a number of legal steps that need to be taken to register a business as a corporation.

When a business is incorporated, it becomes a totally separate entity from the people who own it, and thus the owners can no longer have their assets taken to satisfy the corporation’s debts.

Additionally, the business can raise funds, hire workers, and even acquire other entities with its cash reserves or other assets.

However, if the corporation has financial difficulties, the corporation’s assets, along with any assets of its subsidiaries, can be liquidated and used to pay debts if necessary.

Although even if this is not sufficient to pay the corporation’s debts, the assets of the shareholders can still not be taken to satisfy these debts.

This is why it is common for businesses to incorporate.

Differences Between Corporation and Incorporation

Incorporation

  • Incorporation is the process of forming a corporation. It is a process that consists of a number of legal steps that are intended to protect the owners and shareholders of the corporation. The process provides protection in areas such as retirement funds, credit rating, taxation, and transferability of ownership, among others.
  • Incorporating a business is a way of helping to protect owners and shareholders by giving them limited liability, which can be particularly helpful if there is a business downturn. It can also make it easier to raise capital.

Corporation

  • Corporations are established through incorporation and, once established, deal with running the business on a daily basis as well as establishing the long-term strategy of the business so as to make money for the shareholders.
  • A corporation is subject to a number of rules and regulations. Corporations do suffer from the issue of double taxation. This is due to the fact that the corporation is taxed as an entity, and then the shareholders are taxed on the dividends they receive from the corporation.

Comparing Corporation to Incorporation

 CorporationIncorporation
ImportanceA corporation is an entity formed through the incorporation process.Incorporation is the process through which a corporation is formed.
StatusShareholders form a corporation in order to run a charity, business, or other organization.Incorporation involves the steps necessary to form a corporation.
LifespanA corporation can continue existing as long as it remains solvent.Incorporation is a process that starts with issuing a certificate of incorporation and ends when the corporation is formed.
PurposeThe corporation is responsible for running the business on a daily basis.Incorporation is a process that helps to ensure that the assets and interests of the owners and shareholders of a corporation are protected.
RightsCorporations are legal entities that have rights, such as the ability to own property or responsibilities such as paying debts. If they do not pay their debts, they can be sued.Incorporation is a process and therefore does not have rights and responsibilities.
Other CountriesCorporations in countries outside of the United States are very similar.Incorporation is based on the laws in the area the corporation is being formed in.

Final Thoughts

Running a business involves a lot of risks, and if the business fails, the owners risk having their assets, including their home, taken to satisfy unpaid debts.

However, if the owners or shareholders incorporate the business, it limits the liability of the owners and shareholders.

In fact, in most cases, the assets of the owners and shareholders cannot be claimed to pay the business’s debts even if the business fails.

This makes incorporation a popular choice for businesses.

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  1. Internal Revenue Service "Forming a Corporation" Page 1. May 2, 2022

  2. Sam Houston State University "BASICS OF CORPORATIONS" Page 1. May 2, 2022