Key Differences Between a Corporation vs. Incorporation
By Indeed Editorial Team
Published November 24, 2021
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
When you operate a company, there are several structures you can use to organize your business legally. You can easily navigate the process of incorporating a company with some fundamental knowledge. Learning about corporations and the process of incorporation can help you better understand the concepts confidently. In this article, we discuss the difference between the terms corporation vs. incorporation, identify types of corporations and the benefits of owning one, and uncover the steps of incorporating a business.
The difference between corporation vs. incorporation
At the most fundamental level, the difference between a corporation vs. incorporation is an entity and a process. A corporation is the legal entity of a business registered with the government. Business owners refer to the method of creating this legal company as incorporation.
What is a corporation?
A corporation is a legal business entity that its owners control through shares in the company. The owners register the business with the provincial or federal government to legally separate the company's activities from its owners. A corporation can own property and assets and incur its own debt.
A corporation is one of three ways to operate a company, with the other two options being a sole proprietor or a partnership. Corporations can last indefinitely, as they exist as independent entities. This differs from sole proprietorship or partnership, as when the owners of these business formations pass away, the business ceases to exist.
Three types of corporations
There are three types of corporations available, depending on the desired business practices of the organization. They include:
Share capital corporations
A share capital corporation is a for-profit business. A minimum of one shareholder can own the company or can offer public shares to many people. When referring to business operations, this is the type of corporation most people consider. This type of business can produce or provide a product or service with endless possibilities. They distribute any profits that the company makes to their shareholders or can reinvest back into the business.
An association of people interested in providing a common want or need to its members owns a cooperative corporation. Some examples include access to products or services, sales of goods and services, or employment. There are four categories of cooperative corporations:
A consumer cooperative provides a product or service to its association members, such as housing, childcare, or retail.
A producer cooperative processes and markets a product or service produced by its members, such as artisans or farmers.
A worker cooperative provides employment for its members, with the employees as both workers and owners of the company.
A multi-stakeholder cooperative brings together various stakeholder groups for mutual benefits, such as employees, customers, and other organizations. You can commonly see this type of corporation in-home health care and social enterprises.
A non-profit corporation conducts business without the intent of making revenue for its shareholders. This includes registered charities, professional associations, or not-for-profit companies. These organizations can offer products or services, and they use all revenue to help the company break even with its expenses.
Benefits of incorporating a business
There are several crucial benefits of incorporating a business instead of operating as a partnership or sole proprietor. These advantages include:
Through the process of incorporation, you create a unique legal entity for a business. This separates your personal and business obligations and liabilities. The company establishes itself as its own entity and can own assets and incur debt without making you legally responsible. Incorporating a company protects your personal property and assets. For example, if the business becomes bankrupt or no longer financially viable, your assets remain protected and untouched. There are some instances when a company's directors are still responsible for the corporation's activities, such as unpaid taxes or outstanding employee wages.
The tax rates for corporations are different from those of individuals and are generally lower. This is because the government determines the taxation for corporations based on a flat rate, where they calculate personal taxes on a progressive scale. There is also a considerable tax expense advantage for corporations as opposed to partnerships or sole proprietors. To maximize your tax return, you can write off many costs of operating the business on corporate taxes, so ensure you consult with an accountant during tax season.
Raising capital and acquiring funding for a corporation is considerably easier than for partnerships or sole proprietors. In a sole proprietor or partnership company, the owners find money to fund their business, typically through personal loans or credit. This can cause considerable strain on the financial health of the owner and the company. In a corporation, the company assumes the risk of business loans or creditors, as the company's structure legally protects the ownership. In addition, the owner can sell company shares to raise capital to fund the business.
Another benefit of incorporating a business is that it can exist indefinitely, as the lifespan of the owners doesn't limit the operations of the company. In addition, owners can transfer shares to other individuals by selling their corporate shares. Transfer of ownership can also take place during succession planning.
How to incorporate a business
Follow these four basic steps to incorporate a business:
1. Name the corporation
The first step to incorporating a business is to name the company. The corporate name becomes the legal description of the entity. There are two options you can pick from. The first is to create a word name for the business comprising letters and numbers. When using a word name, it's recommended to complete a registry name search and trademark search to ensure someone else has not taken the name. Another best practice when naming a corporation is to include three elements, including a distinctive, descriptive, and legal component. For example: Caralyn Coffee Inc.
In this name, Caralyn is the distinctive element, coffee is the descriptor, and incorporated is the legal ending. If you are using a numbered company, the government assigns the number with the province of operations. The legal ending for a numbered company is typically Ltd. For example, a numbered company may be 1234567 Alberta Ltd. There are also four legal endings you may use, including:
Ltd. or Limited
Corp. or Corporation
Inc. or Incorporated
ULC or Unlimited Liability Corporation
Within every province, all four legal endings have the same meaning. When you choose the corporation's name, you also decide on the legal ending. Which option you choose makes no difference to the structure of the company.
2. Create the articles of incorporation
The next step is creating the articles of incorporation for the business. The articles determine the business structure and include the following:
information about the share structure for the company
information on the company's directors, including contact details and mailing addresses
any restrictions you want to place on the business activities
shareholder resolutions and certificates
the company's official bylaws
A corporation maintains a formal minute book that, at any time, a company's shareholders or creditors may request to view. The minute book contains all corporate documents of the business and is a legal requirement of incorporation.
3. Establish the head office address and names of the company's directors
The third step is to establish the physical and mailing address of the corporation's head office. Additionally, you establish the names of the company's directors, along with their contact details and mailing addresses. You already have this information from creating the articles of incorporation in step two. The government requires this information to establish the primary physical location of business operations. This is the address to where all corporate documentation, tax information, and legal assessments arrive. Once incorporated, the company's registered office and director's report is publicly available.
4. Submit the incorporation fee
The last step of incorporation is to submit all the above information and provide payment. A business can incorporate within its province of business or nationally. If the company's owner expects to operate outside of their province, they require national incorporation. If they desire to work only in one province, they can incorporate it into their regional area. Registering a corporation provincially is considerably less money than registering federally. The reason is that federal incorporation requires both provincial and national paperwork and two fees instead of one.
5. Maintain your incorporation records and standing
Once the owners incorporate the company, there are several things to do to remain in good standing. Some of these items include:
Maintain your corporate records by filing an amendment to any changes of directors, addresses, or contact information.
Update corporate registries by filing any changes to the corporate structure through an amendment of the articles of incorporation.
File the annual corporate return with the provincial or federal government.
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