In the business world, you can often see business names ending with ‘Inc.’. This stands for Incorporated, meaning the business changed from a non-corporation to a corporation. Now you may ask, so what? What difference does it make if a company is incorporated?
This article presents the concepts underlying incorporation. Here, you’ll learn why and how a company incorporates. Here you will learn the basics of company formation in India.
Business Forms: What Does It Mean if a Company is Incorporated?
The business form is the way the company is created. It involves how many people own the company. Different laws rule a specific business form. Your business registration, accounting, compliance requirements, and taxation depends on what business structure you choose.
There are three types of business structure: sole proprietorship, partnership, and corporation. A sole proprietorship has one registered owner. It’s the easiest business to register an account for. A partnership is one where there are at least two owners.
A corporation is an entity that has a separate juridical personality from its owners. It means that the corporation is like a person in itself, it can transact business with others and it can be sued in its name. Corporation law governs this business structure.
What does it mean if a company is incorporated? Companies can change from one business form to another. For example, single ownership can take a partner and change into a partnership. Further single ownership or a partnership can also change its form into a corporate one. This change is called the incorporation of a business.
Once a company incorporates, it loses its former identity. This means that they lose the ability to transact as sole proprietor or partnership, as they were before. Instead, they become a corporate entity. Incorporation dissolves its former structure and creates an entirely new company.
Companies incorporate so that they can get the benefits of corporate business. Here are key aspects of business incorporation.
Corporations need more documents to register. You’ll have to write Articles of Incorporation and by-laws before you can register. This takes time and needs thorough planning because these will later affect your decision making and operations.
A corporation differs in its capital. Its capital consists of common stocks, preferred stocks, and retained earnings.
Common stocks are the normal ownership in the company. On the other hand, preferred stocks give special rights to owners like receiving income first before the common owners. Lastly, retained earnings are the part of income that’s reinvested for growth purposes.
Companies decide to change into corporations so that they can benefit from a corporate capital structure. Corporations can easily raise capital by issuing more stocks. For instance, a listed corporation can sell their stocks to the public. Furthermore, corporations can easily ask loans from banks. Banks would rather lend money to corporations than to single ownership.
In general, partnerships have ‘unlimited’ debts. This means that when a lender collects and the company cannot pay, he can run after the separate personal properties of partners. This is why many partnerships incorporate. Owners want to have a boundary to separate the company from their personal assets. Corporations protect the personal properties of their investors. As a separate juridical entity, the corporation alone pays its debts.
Income to owners differs in corporations. In sole ownership and partnership, owners get their portion of the profit after the company pays for expenses. In corporations, investors only receive the profit that is declared as dividends. For example, a company may declare 10 INR per share. If an investor has 5 shares in the company, he will receive a return of 50 INR.
Tax agencies generally tax sole ownership and partnership on their distribution to owners. It means that the entity in itself is not taxed, but the owners, in their receipt of profits. Corporations, on the other hand, are taxed on their own as a separate juridical entity.
3E Accounting India
Incorporation of company is a process that requires a lot of work. Are you planning to incorporate your business? We can help you. 3E Accounting India is a leading accounting firm in India that employs professionals skilled at incorporating companies. Consult us today and let us help you in changing your business form.