What Is an Incorporated Business?

Incorporated businesses, also called corporations, are distinct from sole proprietorships and partnerships in a number of ways. Corporations feature unique benefits that give them an advantage over other business types, but there are drawbacks to the corporate structure as well. Small businesses consider incorporating for a number of reasons, including expansion, efficiency of operations and liability protection.

Features of Corporations

The most obvious difference between a corporation and other business structures is the ability of corporations to raise large sums of money by selling stock shares to investors. Instead of being centered on a single person or a small group, ownership of an incorporated business is spread out among stockholders, who have the right to vote on key business decisions.

Large public corporations are listed on stock exchanges, such as the New York Stock Exchange (NYSE), and anyone can access a wide range of financial and operational data about each company. Private corporations and smaller incorporated businesses (so-called S corporations) do not have significant public reporting requirements.

Benefits of Incorporating

As explained in The Corporation: Its History and Future, incorporated businesses are considered legal entities in the eyes of the law. This means the company is liable for its own taxes, debts and the consequences of any legal actions, and has the right to conduct business and initiate lawsuits under its own name. This concept, referred to as limited liability, implies that business owners cannot be held liable for a corporation’s debts, as is the case with sole proprietorships and partnerships. Because of this, the owners – stockholders – only stand to lose the amount that they invested in the company if things go sour with the company’s finances.

Tip

Incorporation vs Corporation: Incorporation is the legal act of registering a business in order to become a corporation. Incorporation is what you do, and a corporation is what you are.

Corporations also have an advantage over other business types in the amount of money they can raise through equity financing rather than debt. Aside from optionally paying dividends, a corporation is not required to repay stock investors for the money they invest. Other business structures must rely to a greater extent on debt, which must always be paid back with interest.

Drawbacks of Becoming a Corporation

Corporate income is technically taxed twice. The corporation, being a legal entity, pays taxes on its own income. Executives and stockholders must subsequently pay their own personal income taxes on the money received from the corporation, which ultimately comes from the company’s income. This differs from sole proprietorships, in which all business income is considered the personal income of the owner for tax purposes. Unique corporate structures such as the Limited Liability Company (LLC) and S Corporation avoid double taxation, making them attractive corporate options in a number of industries.

As noted by All Business, additional drawbacks include the possibility of original company founders losing all management control through the voting power of stockholders, and the extensive reporting and auditing requirements imposed on public corporations by the Securities and Exchange Commission (SEC).

Business Size and Scale-Up

Due to an incorporated business’ ability to raise large sums of money relatively quickly, corporations have the potential to be much larger than other forms of business, although not all are. Corporations have the power to scale up very quickly, assuming their business model and product offerings are valuable, and often conduct business internationally, with branches or subsidiaries in diverse countries around the world.

Other Things to Consider

Corporate businesses can struggle more than other forms of business when it comes to business ethics. The nature of the corporate structure is such that executives and managers are mainly concerned with the financial success of the company and its stockholders. This often single-minded drive for continual revenue and profit growth can lead corporate managers to make unethical decisions, such as outsourcing a department full of loyal, long-term employees just to add a single percentage point to the profit margin, or engaging in practices that destroy the natural environment without any regard to the cost and external stakeholders.