Corporate Finance Tutorials
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Difference Between 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 corporation vs incorporation. Even though the two terms are closely related, they can’t be used interchangeably as they have some unique differences.
What is a Corporation?
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 which would carry out the business activities, charity corporations which would look after the functioning of a charitable organization, sports corporation which 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 same major business corporations across the world.
- A corporation is mainly constituted when one or more shareholders come together to pool their resources for a common objective like earning a profit.
What is Incorporation?
Incorporation, on the other hand, is the process of incorporating a business and hence the name incorporation. It refers to the series of legal steps carried out to register a business establishment as a corporation.
- It separates the business entity from its owners and hence safeguarding them from the liabilities of business establishments. The business unit thus formed can hire employees, raise funds and can also acquire another entity using its assets and cash reserves.
- However, in case there is a setback in the business because of which the creditors must be paid back, then the assets of the legal entity 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 the reason why many industries, once they become large, try to turn their businesses into corporations.
Corporation vs Incorporation Infographics
Here we provide you with the top 6 difference between Corporation vs Incorporation
Corporation vs Incorporation – Key Differences
The key differences between Corporation vs Incorporation are as follows –
#1 – Process vs Product
- The process of incorporation comprises a series of legal steps that are 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.
- Corporation on the other hand 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 which have been established in the past and are running for centuries like Morgan Stanley, Bank of New York Mellon, AT & T etc. Corporations are more complex legally and expensive to maintain. This is the reason most small-scale businesses are advised to go through the process of incorporation 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 name of the corporation (which should be distinct helping it identify from other corporations), an address of the main office and description of the expected activities it is supposed to carry out. Approval of the same mark the establishment of a corporation for a time span which 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 of a business. Additionally, it provides an individualistic significance to 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 not only has to file tax on the profits it earned but also on the profits it shares with its shareholders. This is because the stakeholders must file income tax on the dividends they earned from the corporation.
Corporation vs Incorporation Head to Head Difference
Let’s now look at the head to head difference between Corporation vs Incorporation
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.
|Basis – Corporation vs Incorporation||Corporation||Incorporation|
|Significance||A corporation is the final legal product that an entity transforms into after going through the process of incorporation.||Incorporation is the legal process or the transition by which an entity becomes a corporation.|
|Status||A corporation is a body formed to carry out a specific operation like a business, charity, sports club etc.||Incorporation is a series of steps that help an entity becomes a corporation|
|Lifecycle||Corporation continues to exist as long as it is able to pay back its liabilities and build on its assets failing which it is liquated and cease to exist.||Being a process, incorporation starts when a certificate of incorporation is issued till corporation is finally constituted.|
|Operations||A corporation is mainly responsible for carrying out the day to day activities related to the business or functioning of the legal entity.||Incorporation takes care of legal steps that are aimed at safeguarding the interests and the personal assets of owners or shareholders.|
|Rights and Responsibilities||Corporations are personified as legal persons having rights like owning a property which can help owners in saving taxes or raising funds and responsibilities like in case of payment failures to creditors, they can be sued and dragged to court.||Incorporation is a structured process with limited responsibilities and limited rights.|
|Sovereign Risk||Corporations in different countries will have almost the same functioning, features and goals.||The process of incorporation differs from country to country based on local laws.|
Corporation vs Incorporation – Final Thoughts
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 your profits in the form of regulatory penalties or legal costs. Incorporating your business helps you in handling these risks by providing limited liabilities to the stakeholders. Incorporation and Corporation ideally can’t be differentiated with each other as one leads to another. The difference between Corporation vs Incorporation is the same as the difference 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 Corporation and Incorporation along with infographics and comparison table. You may also have a look at the following articles –
- What is the Cash Reserve Ratio (CRR)?
- Best Differences Between Liability vs Debt
- Top 13 Differences Between Shares vs Debentures
- Corporation vs LLC
- Industry vs Sector
- Creditor vs Debtor Differences
- Shares vs Mutual Funds Differences
- LLC vs Corporation Differences
- Sole Proprietorship vs Partnership Differences
- Licensing Vs Franchising Differences
- Leasehold vs Freehold Differences