Advantages and Disadvantages of a Corporation

Are you the owner of a business who is unsure about whether it is appropriate to incorporate your activities? Then the best outcome from this guide to the pros and cons of corporations is to speak with a legal professional familiar with this area of the law. The type of legal structure you eventually decide to use for your company can play a significant role in the success or failure of this venture. If you operate a sole proprietorship, then the business disappears the moment you decide to stop operating. Corporations act a little differently, allowing for the transfer of shares from one person to another. A form of business organization with the liability-shield advantages of a corporation and the flexibility and tax pass-through advantages of a partnership.

The leadership team must have some level of oversight present in the daily operations to ensure the efforts made are ethical and authentic. The organization has shareholders, officers, and directors that all complete duties within the corporate framework. That structure means anyone can look at the chain-of-command to determine which person can provide the most help. A corporation is owned by one or more shareholders, and the percentage of each one’s ownership directly correlates to the number of shares they own. Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.

1. When a company does go public, they will issue an IPO or initial public offering.
2. Corporations are more difficult to form as compared to other types of businesses.
3. The only way a corporation ends is if it deliberately ended through liquidation or other means.
4. Without a distinct business entity, however, there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner.

As an owner, your biggest incentive in setting up your company as an S corporation is to cut costs, especially on taxes, although choosing that structure could limit your options for growth. Corporations may be required by law to perform audits and comply with certain rules and regulations. However, these solutions still do not guarantee that agency problems within corporations will not exist. For corporations, it means that they do not have to be affected by shareholders leaving or buying shares.

Corporate Liquidation

You should also consider the fact that if you form a corporation, there’s no guarantee that you will be able to maintain your standing in your business. The board of directors can take total control of your business, and you may find yourself forced out of the business that you founded. Some entrepreneurs interested in forming a corporation decide to file their own paperwork. Although this is certainly possible and can save you a great deal of money, you need to schedule at least one consultation with an experienced business attorney. During this consultation, your attorney can tell you about some of the potential pitfalls of forming a corporation and may give you a few tips that will make the process of incorporation much simpler. Depending on the state where you form your corporation, you may spend up to $150 on filing fees, assuming you are filing directly with your Secretary of State.

Double Taxation

Some exceptions might apply if the company wants to register for secondary state registrations in the U.S., but an agent or contact person must be present for consumers to contact. In exchange disadvantages of corporation for maintaining a separate identity, the personal assets of the owner(s) cannot be targeted by litigation. A corporation is a group of people or a company authorized to act as a single entity.

Owners would need to contact the IRS in the U.S. to make a special election using Form 2553 to achieve this outcome. This advantage allows for investors to earn returns while the corporation works on growing new opportunities. Monique Danao is a journalist and freelance writer who has worked with several startups and tech companies. Her work has been published in Sitepoint, Fast Capital 360, Social Media Today, WPMayor among other publications.

I’d recommend taking help and guidance from an attorney and a tax advisor before you embark on your journey to forming a corporation. This price varies by state, and it can go well over $400 in some areas. However, if you are new to business, you should at least consult with a business attorney before attempting to form a corporation on your own. It is possible that even if you started the corporation, a board could take control of the business, leaving you without a say.

Advantages of a Corporation

Consumers want value in the products and services they purchase. Other business structures, including sole proprietorships and partnerships, may be able to give something similar, but not always with the same levels of expertise, reputation, or history. Alongside the lengthy application process is the amount of time and energy necessary to properly maintain a corporation and adhere to legal requirements. You must follow many formalities and heavy regulations to maintain your corporation status. For example, you need to follow your bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create annual reports. There are also restrictions on certain corporation types (for example, S-corps can only have up to 100 shareholders, who must all be U.S. citizens).

Difference Between S or C Corporation

Simply select “S Corporation” tax status instead of “C.” This will make it possible for your business to avoid double taxation. There is a higher level of tax liability to manage with corporations. When a corporation earns profits, then the money can sometimes be taxed twice in the United States. This disadvantage occurs because the business gets a tax bill for whatever it earns while individual shareholders who receive paid dividends get hit with their own bill from the government to manage. It is an outcome that happens most often with the biggest companies, so some shareholders or company owners might not see it develop. Filing your articles of incorporation with your secretary of state can be quick, but the overall process of incorporating is often a long one.

Disadvantages

The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Advisory services provided by Carbon Collective Investment LLC (“Carbon Collective”), an SEC-registered investment adviser. Incorporation involves drafting “articles of incorporation” which lists the primary purpose of the business and its location, along with the number of shares and class of stock being issued if any. A publicly held corporation is a corporation whose stock is sold to and owned by the public instead of private investors. The shares of such corporations are traded on a public stock exchange (e.g., the New York Stock Exchange or NASDAQ in the United States).

If an S-corporation forms, its shares cannot be publicly traded. Organizing in this fashion if there is an idea of becoming a C-corp one day might not be the best option since there can be challenges when reselling shares. There could be a lack of interest in the market or a disagreement over its value that could lead to problems with the completion of a transaction. Some corporations have a restriction on the number of allowed shareholders. Under the structure of a standard S-corporation, there is a limit of 100 shareholders in place.

These requirements may include creating corporate bylaws and filing articles of incorporation with the state secretary. This ownership is easily transferable via the buying and selling of stock. This article is for business owners trying https://accounting-services.net/ to determine their business structure and determine whether a corporation makes sense. To summarize, some benefits of a corporation include protecting personal liability, security, business continuity, and easier access to capital.