An incorporated business, or a corporation, is a separate entity from the business owner and has natural rights. Conversely, a business owner and an unincorporated business are the same, and the owner personally bears all results of the business. Unincorporated businesses are usually sole proprietor or partnership companies. The main difference between an incorporated and unincorporated business is the way owners shoulder business activities.
An incorporated business protects owners from liabilities they might incur from running the business while an unincorporated business does not. If the business defaults on a debt, payment for that debt must come from the investment in the business, not the business owner's personal property. The same is true with lawsuits against the business. If an incorporated business loses a lawsuit, the corporation, not the owner, is responsible for paying up. Conversely, business owners of private businesses are personally liable for any debts or lawsuits against their business.
Corporations pay a lower tax rate than individuals. Additionally, incorporated businesses can defer taxes to a later date, and if the business qualifies as a small business, it may qualify for a small business tax deduction. Incorporated businesses must file separate business tax returns while the unincorporated business owner can file one individual tax return. An unincorporated business also has some flexibility when dealing with taxes, as it can claim personal tax credits that an incorporated business cannot. Also, owners of unincorporated businesses can use business losses to decrease their personal income.
Initial costs to set up a corporation can be as low as $60 to file the articles of incorporation, but fees depend on the state. Add in annual filing fees for government and regulatory boards and the costs quickly increase. Business owners may also pay considerable fees for legal help if they hire lawyers to assist with the set up and maintenance of the corporation. Additionally, incorporated businesses also must pay ongoing maintenance costs, which can include more detailed accounting records, financial statement preparations and federal and local tax return filings. Except for the occasional legal assistance or professional tax assistance, owners of sole proprietorship companies typically do not incur these costs.
In addition to preparing quarterly and annual reports for government and regulatory agencies, incorporated businesses also must call, organize and record annual shareholder and corporate meetings. These preparations can include extensive paperwork, as invitation and supporting documents must be mailed out. Additional paperwork can include financial statements and other reports that must go out to shareholders. Unincorporated businesses typically don’t have these concerns.
Unlike unincorporated businesses, corporations carry on even after an owner dies or another investor buys the company. Unincorporated companies must re-title and draw up new deeds to transfer property, while corporations need only issue stock shares for the property. Incorporated companies also have a greater ability to raise money, as they can issue more stock. This, however, dilutes the original owners’ stake in the company. Corporations must remain transparent and must report their activities to shareholders, the government and, depending on their industries, various commissions. Unincorporated business owners usually can skip this reporting and keep their business activities private.
- Entrepreneur: Incorporating Your Business
- Introduction to Business Law : Lucy Jones
- Streetwise Incorporating Your Business: From Legal Issues to Tax Concerns; Michele Cagan
- Nolo's Encyclopedia of Everyday Law; Shae Irving
- Die Broke Complete Book of Money; Stephen Pollan, et al.
- Arizona Corporation Commission: Fee Schedule - Corporations
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