Corporation vs Incorporation

If you are an entrepreneur or the owner of a budding business, it becomes imperative for you to understand the difference between a corporation and incorporation. Even though the two terms are closely related, they can’t be used interchangeably as they have some unique differences.

A corporation is an entity that has been formed to carry out business and governing of any kind. There can be multiple types of corporations like business corporations that would carry out the business activities, charity corporations that would look after the functioning of a charitable organization, sports corporations that would supervise governing of a sports club, etc.

• In simple terms, corporations are referred to when we talk of business establishments, large organizations, and governing groups.
• For example, Alphabet, under whose name Google operates, General Motors, Future lifestyle, Toyota are the same major business corporations across the world.
• It is mainly constituted when one or more shareholders pool their resources for a common objective like earning a profit.

On the other hand, incorporation is the process of incorporating a business and hence the name incorporation. It refers to the series of legal steps to register a business establishment as a corporation.

• It separates the business entity from its owners and safeguards them from the liabilities of business establishments. The business unit thus formed can hire employees, raise funds, and acquire another entity using its assets and cash reserves.
• However, if there is a setback in the business, the creditors must be paid back. The legal entity's assets and its subsidiaries (if any) will be liquidated. In such a scenario, no claim can be made on the assets of the owners and shareholders.
• This is why many industries, once they become large, try to turn their businesses into corporations.

#1 - Process vs Product

• The process of incorporation comprises a series of legal steps aimed at safeguarding the interests of the owners and shareholders. It protects them and deals in issues like taxation, retirement funds, transferable ownership, credit rating, etc.
• On the other hand, the Corporation, once constituted, is more interested in running the day-to-day operations and carrying out strategies for the long-term sustenance of the firm, and generating profits for the owners. It can continue to exist as long as it is solvent.

We have corporations that have been established in the past and are running for centuries, like Morgan Stanley, Bank of New York Mellon, AT & T, etc. They are more complex legally and expensive to maintain. This is why most small-scale businesses are advised to go through the incorporation process only when they have become sufficiently large and can handle legal costs.

Incorporation should file a charter with the regional corporate office, which should contain details like the corporation's name (which should be distinct helping it identify from other corporations), an address of the main office, and a description of the expected activities it is supposed to carry out. Approval of the same marks establishing a corporation for a time that can even outlive its founders or shareholders.

#2 - Rights, Responsibilities and Tax Implications

• Incorporating a business is one of the mechanisms that convert a business enterprise into a robust business structure. This is because it provides limited liability to the owners and shareholders from the economic booms and downturns. Additionally, it offers an individualistic significance for the legal entity, and it becomes easier to raise equity and employ human resources. However, this dominant business structure comes with a cost.
• A corporation is governed by some rules and regulations subject to the sector it operates in. Also, there is a concern of double taxation as the corporation has to file tax on the profits it earned and the profits it shares with its shareholders. This is because the stakeholders must file income tax on the dividends they earned from the corporation.

In simple terms, incorporation is a stage for an establishment to become a registered corporation. Let's dive in further and discuss some more differences between the two.

Maintaining a business is a risky endeavor, especially in a developing country like India. The rules and regulations can anytime burn a hole in your pocket and cut away from your profits in the form of regulatory penalties or legal costs. Incorporating your business helps you handle these risks by providing limited liabilities to the stakeholders. Ideally, incorporation and corporation can't be differentiated as one leads to another. The difference between both is the same as between swimming and the swimmer. One is the process, and the other is a product.

This has been a guide to the Corporation vs. Incorporation. Here we also discuss the top differences between the two, infographics, and a comparison table. You may also have a look at the following articles –

• Licensing Vs Franchising
• Leasehold vs Freehold
• Pecking Order Theory