What Does Incorporated Mean in Business?

By Kay Lee

When creating a new business, the owner can structure the business in a number of ways that best suit his preferences as well as the type of business he is creating. When a business becomes incorporated, it has completed the process of becoming a corporation, as recognized by state law. Incorporation provides the owners with many advantages, but the primary benefit is the business will be viewed as a separate entity from its owners.

What is a Corporation?

A corporation is a type of business organization viewed as a separate legal entity under state law. This allows the corporation to do things a person can do, such as pay taxes, initiate litigation and be sued by others. Parties who sue the corporation are limited to the corporation’s assets and are unable to tap into the shareholders’ personal assets. Shareholders' liability is limited to their investment in the corporation, thereby protecting their personal assets.

How to Form a Corporation

Corporations are creatures of state law; therefore, the particular state where you incorporate will determine how you must establish the corporation. Generally, the founders of the corporation draft articles of incorporation that must be filed with a state agency like the Secretary of State. Many states require corporations to adopt a business name that indicates its designation as a corporation. This designation is often expressed through the use of “Inc.” in the business name. This essentially puts its customers and other individuals on notice that the business is a corporation. In addition to filing the articles of incorporation, the company must continue to meet the state’s continuing disclosure rules, like annual reports and fee requirements.

Ready to incorporate your business? Get Started Now

Benefits of Corporate Form

Corporations, unlike partnerships, have an unlimited life, meaning the corporate form will continue indefinitely unless the shareholders or board of directors take active steps to end the corporation. This is significant because default state laws for partnerships typically dissolve a partnership when partners leave. In addition to unlimited life, the corporate form offers protection from personal liability for the shareholders of the corporation. Shareholders are liable for the actions and debts of the company only to the extent of their investment. Shareholders, however, may be held personally liable for willful wrongdoing. The final benefit is that corporations are taxed at a lower rate than individuals, so corporate earnings can grow in a more tax efficient manner than if the business entity was a partnership or sole proprietorship where taxes are passed down to owners who include them on their personal income tax returns.

Disadvantages of Corporate Form

Many people consider the corporate form to be disadvantageous because of the double taxation issue. Double taxation occurs because a corporation must pay taxes on the profits it earns and those profits are typically shared with the corporation’s stockholders through dividends. Shareholders must then include these dividends as part of their personal income for the year and are taxed on it again.

Ready to incorporate your business? Get Started Now
Can You Fill Out a 2553 Before the Articles of Incorporation?


Related articles

LLC Vs. C Corporation

Limited liability companies and C corporations are both business entities. They are legally distinct entities that are treated separately from their owners, known as members and shareholders, respectively. State laws govern both LLCs and C corporations and these laws vary across state lines in detail. However, many of the same principals for LLCs and C corporations exist in all states. They have differences when it comes to management, business formalities, owner liability and tax treatment.

A Comparison of an LLC, Sole Proprietor, S Corp, & C Corp

Once the decision to form a business has been made, the founders must consider the type of business they wish to form, such as an LLC, sole proprietorship, S corporation or C corporation. While state law governs the formation and operation of these business types, several of these entities have basic characteristics that are the same from state to state. In addition to determining in which state you wish to create your business, there are several factors to consider - like liability and taxation – when deciding the best form for your business.

A Professional Corporation vs. an LLC

Starting a new business is a big undertaking that requires making many decisions. Once you have developed a vision for the business, you must decide how to structure it. Each state has laws that govern the basic structure and specific rules for each type of business entity permitted in that state. Two examples of common business forms in all states are professional corporations and limited liability companies. PCs and LLCs are popular choices for small businesses. You must determine which business form will best suit your company's needs.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Forms Do I Need to File for an S Corp?

An incorporated business is automatically designated by the Internal Revenue Service as a C corporation for income tax ...

What Is a Disadvantage of the Corporate Form of Business Entity?

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of ...

Can the Officer of a Corporation Be Held Personally Liable?

One of the most significant benefits to organizing a business as a corporation is that it protects the officers and ...

How Can a Person That Owns a Corporation Get Sued for Fraud?

One of the biggest advantages of a corporation is that this business structure protects controlling shareholders from ...

Browse by category
Ready to Begin? GET STARTED