Key Takeaways

  • The main advantages of a corporation include limited liability, perpetual existence, easier capital acquisition, and enhanced credibility.
  • Corporations benefit from tax deductions on benefits, potential income splitting, and access to lower corporate tax rates.
  • Incorporation can boost brand trust, attract investors, and facilitate employee stock options and benefits.
  • Corporate structure promotes business continuity, clear management hierarchy, and easier ownership transfer.
  • However, corporations face more regulations, double taxation (for C corps), and greater administrative obligations.

Choosing the right structure for your business is one of the most important steps you will take in your company’s journey. The right structure will protect you from liability, ensure maximum tax advantages, and position you for success. The first question is whether to incorporate your business at all.  This decision requires, at a minimum, a basic understanding of the advantages and disadvantages of corporations.

What are the Different Types of Corporations?

There are two primary types of corporations:

  • General Corporations, or “C” Corporations, is the most common business structure in the United States.  C Corporations are able to issue shares to raise funds from investors.  C Corporations have an unlimited number of shareholders. These shareholders are protected from business liabilities.  However, C Corporations are usually subject to double taxation, meaning that they are taxed twice. The corporation’s income is taxed at the company level, and then again at the shareholder level since shareholders are taxed when they receive profits or dividends from the company.  ​
  • S Corporation is an IRS designation that allows the profits and losses to be passed through to the owners’ personal tax returns. This structure also limits personal liability, but an S corporation is limited to 100 U.S. resident shareholders.

In addition, while not available in all states, an entrepreneur may be able to form a close corporation – generally with a limit of 30 to 50 stockholders.  This structure is less common and used when there are only a few individuals who are closely associated with the business.  Usually, a close corporation may not be publicly traded, and can be run directly by the shareholders (without a formal board of directors and without a formal annual meeting).  Close corporations shares have limited resale value.

Why Businesses Choose to Incorporate

Many entrepreneurs choose incorporation because it offers long-term growth potential, legal protection, and credibility that other structures often lack. Incorporating separates personal and business assets, protecting owners from personal liability for debts and lawsuits. This is one of the primary advantages of corporation formation and a key reason why businesses transition from sole proprietorships or partnerships to corporate entities.

Additionally, incorporation gives your company formal recognition as a legal entity. This allows it to enter contracts, own property, and sue or be sued under its own name. Corporations also benefit from perpetual existence — meaning the business continues to operate even if shareholders leave or pass away — providing stability and reassurance to customers and investors.

What are the Advantages and Disadvantages of a C Corporation?

Advantages

  • Limits on Liability. Corporations are entities of their own. This means the owners of the company are not personally liable for the debts or other liabilities of the business.  However, in some limited situations, it may be possible for an outside party to “pierce the corporate veil” and hold the owners personally liable (e.g., the person fails to treat the company as a separate entity instead of an extension of her personal property).
  • Risk to Shareholders.  Each shareholder is risking only the amount of her investment in the company.
  • Raising Money.  Additional funds may be raised at any time by selling shares in the company to other investors.  A corporation also may be considered more credible by lenders, customers and suppliers.  Foreign nationals can own stock in a C Corporation (unlike an S Corporation).
  • Tax Liability of the Corporation.  Shareholders and company founders cannot be held personally liable for tax liabilities in a C Corporation.
  • Benefits to Employees.  Corporations may deduct the cost of benefits to employees and officers of the corporation on their taxes.
  • Longevity.  Unlike a sole proprietorship, a company can survive its founder. In the event of death or disability of a company founder, the corporation lives on.
  • Transfer of Ownership.  A C corporation can be easily transferred to another person or company.  A change in ownership does not impact the business structure.
  • Income Splitting to Reduce Taxes.  The company can reduce taxes by using income splitting to leave money in the company without paying taxes on it or shifting profit around and using lower corporate income tax rates.
  • Few Legal Surprises. Corporations have been around for centuries so there are a lot of case law examples and few, if any, legal surprises.  In addition, corporation rules are fairly uniform across the country.
  • Other Tax Advantages.  While C corporations are subject to double taxation, there are also some valuable tax deductions that can reduce the overall taxable income including:
    • Medical Insurance.  Most corporations can deduct the full cost of medical insurance for families of the owner(s).
    • Retirement Plans.   If setup properly, a retirement plan can be set up as a benefit to the company owners and may be deductible.
    • Profits and Losses.  While C corporations are taxed on their profits, they are also able to fully deduct any losses on operations from their corporate tax returns.
    • Carried Profits.  A corporation may carry their profits forward for future expansion; no distribution of profits is required which may have tax benefits.
    • Salaries and Profits. Only salaries drawn by the founders are subject to self-employment taxes. Profits and salaries must be properly structured to gain this benefit.
    • Leasing Assets.  If done properly, you can lease certain personal property such as your vehicle to the business which allows you to deduct the cost of repairs and maintenance as well as the rental of the vehicle.

Disadvantages

  • Expenses Involved.  When forming a corporation, it is typically more expensive and takes more time than other business structures. In addition to start-up fees, most corporations are subjected to annual fees as well on a state level.
  • Double Taxation.  Profits of a corporation are taxed at the corporate level and when distributed to shareholders are also taxed at the personal level. Dividends are not deductible from business income.
  • Annual Reporting.   Annual reports, corporate income taxes are required for corporations. In addition, accounting records must be maintained; other reports including minutes of meetings of both board members and shareholder meetings. There are licenses that must be renewed annually in many cases.  Along the same line, C corporations generally tend to experience more government oversight.
  • Excessive Tax Filings. A C corporation is required to file state and local income taxes. In addition, depending on the type of business, the business also may be required to pay local taxes, sales taxes and excise taxes. Corporations with employees must make regular payroll tax filings.
  • Board of Directors Restrictions.  Federal and state laws apply to all corporations. In many cases, there can be restrictions on the number of family members who may be on the board of directors.
  • Potential Agency Problems.  In some cases, boards may hire an outside management agency. The potential exists that the management agency could act in their interest versus the interests of the corporation.
  • Shareholders are separated from the business operations.  Shareholders are considered the owners of the corporations, but only have the power to elect directors unless they are voting for approval of major corporate decisions. Shareholders can be elected as a director or appointed as an officer.
  • Strict Management Structure. Corporations must have a corporate structure with a Board of Directors who handle the management responsibilities of increasing shareholder profits and allocating company resources and corporate officers who handle the day-to-day operations.
  • Increased Taxation on Salaries. Salaries face Medicare and Social Security taxation.
  • No Tax Savings on Operating Losses. C corporation shareholders can't deduct operating losses.

Expanded Benefits of Incorporation

Beyond limited liability and credibility, corporations enjoy several operational and financial benefits that strengthen their market position and long-term sustainability. Key advantages of corporation structures include:

  • Access to Capital: Corporations can issue stock to raise significant funding, making it easier to attract investors and expand operations. Venture capitalists and institutional investors often prefer corporations due to their transparent structure and regulatory oversight.
  • Tax-Deductible Expenses: Business-related expenses such as employee benefits, insurance premiums, and professional services are often deductible, reducing the corporation’s overall tax burden.
  • Perpetual Lifespan: Unlike other business structures, a corporation doesn’t dissolve upon the death or departure of an owner. This makes it ideal for succession planning and long-term investment stability.
  • Enhanced Credibility: Customers, lenders, and suppliers often view corporations as more reliable and established, which can improve contract opportunities and negotiation power.
  • Stock-Based Incentives: Corporations can offer stock options or profit-sharing plans to employees, motivating performance and attracting top talent.

Corporations also benefit from transferable ownership, meaning shares can be sold or transferred without disrupting operations. This flexibility helps companies scale and secure additional investors with minimal administrative burden.

Additional Advantages and Disadvantages of an S Corporation

Advantages

  • Advantage for Business Losses. This allows business losses to be passed through to individuals to be used as deductions on their personal income taxes.
  • Self-Employment Taxes.  S Corporations allow individuals to save on self-employment or Social Security/Medicare taxes in addition to reducing non-business income using losses from the business. However, C corporations cannot do this since they are a completely separate tax entity.
  • Business Expense Tax Credits. The shareholder/employees can write off certain business expenses.

Disadvantages

  • Less Flexible Stock Classes. S corporations can have only one class of ownership.
  • Profits and Losses Allocated on Percentage Ownership. Since S corporations must have only one class of ownership, profits and losses from the business must be allocated based upon capital contributions from shareholders.
  • No More than 100 Owners. Owners also cannot be “non-resident aliens”, C corporations, LLCs, other S corporations, or non-qualified trusts. LLCs and C corporations do not have limits on the number of owners.
  • Increased Taxes.  Sole proprietors, partners, and employees owning more than 2% of an S corporation must pay taxes on the benefits such as group-term life insurance, medical reimbursement plans, medical insurance premiums, and parking.  In addition, a shareholder needs to receive reasonable compensation.

Incorporation and Growth Opportunities

Forming a corporation also enhances business growth potential by creating a structure that can accommodate multiple investors, shareholders, and management layers. Because corporations can easily transfer ownership through stock sales, expansion or mergers become less complex. This structure is particularly advantageous for startups seeking venture capital or future public offerings.

From an operational standpoint, corporations can also:

  • Build Brand Value: The "Inc." or "Corp." designation conveys legitimacy, which can boost public trust.
  • Expand Internationally: The corporate framework allows for easier establishment of branches or subsidiaries in other states or countries.
  • Strengthen Borrowing Power: Banks and financial institutions are more likely to approve loans or lines of credit for corporations because of their formal governance and documented financial history.

Incorporation provides not just financial leverage but also strategic flexibility for businesses aiming for sustainable and scalable growth.

Choosing the Right Corporate Structure

When deciding to incorporate, it’s essential to choose the right type of corporation — whether a C corporation, S corporation, or close corporation — based on your company’s ownership goals, tax preferences, and investment plans.

  • C Corporations suit businesses planning to raise substantial capital or go public.
  • S Corporations are ideal for small businesses wanting tax pass-through treatment without double taxation.
  • Close Corporations work best for family-run or closely held companies that prefer minimal shareholder requirements.

Each type offers different advantages of corporation formation, so it’s wise to evaluate ownership structure, tax obligations, and long-term growth goals before making a choice.

For personalized guidance on which corporate structure best fits your business strategy, consider consulting a qualified business attorney. You can find experienced legal professionals through the UpCounsel marketplace to help with incorporation, compliance, and ongoing governance matters.

Frequently Asked Questions

  1. What are the main advantages of a corporation?
    Corporations provide limited liability protection, easier capital access, perpetual existence, and enhanced business credibility.
  2. Do corporations pay less in taxes than other business types?
    Not always. While corporations face double taxation, they also enjoy deductions and income-splitting strategies that can minimize overall taxes.
  3. Why do investors prefer corporations?
    Corporations can issue stock, have formal governance structures, and offer transparency that attracts both private and institutional investors.
  4. How does incorporation protect my personal assets?
    Incorporating separates your personal and business finances, shielding personal property from business-related debts and lawsuits.
  5. What are the disadvantages of a corporation?
    Complex paperwork, higher formation costs, and double taxation for C corporations are the main drawbacks, though the long-term benefits often outweigh these issues.

If you need to know the advantages of corporation, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.