Disadvantages of Corporations: Everything You Need to Know
While a corporation makes it easier to raise money, protect your assets, and transfer ownership, there are a few disadvantages you should consider. 3 min read
Corporations: What Are They?
Before discussing the disadvantages of corporations, it may be helpful to know that a corporation is a business that is a legal entity of its own. It is separate from those who start it or are employed by it. Corporations provide liability protection for those who start them. Other business structures, such as a limited liability company (LLC), also provide this protection.
This means that you can protect your personal assets by filing as a corporation or an LLC. While a corporation makes it easier to raise money and transfer ownership, there are a few disadvantages you should consider.
Disadvantages of Corporations
There are many reasons you may choose to form something other than a corporation. These reasons fall into a few categories.
Corporations are subject to double taxation. They are taxed on a corporate level, and shareholders who receive dividends are then taxed on a personal level.
You'll also have to pay self-employment taxes if you're an employee of the company.
Paid dividends cannot be deducted from taxable income.
Forming an S-Corp can prevent some of these tax issues, but not all corporations are eligible.
Documentation and Costs
Forming a corporation is more expensive and time-consuming than other business entities.
Corporations face government oversight and must keep detailed records of business activities.
Most states charge a yearly franchise tax fee.
You cannot own a corporation. This means a board of directors will be making the decisions.
The board of directors could potentially remove you from company.
The management team could ignore owner oversight if no one has a majority interest in the company.
If you file a corporation, your shareholders are going to be taxed after your corporation has been taxed. With an LLC or S-Corp, dividends distributed are only taxed on the personal level.
If you form a corporation and disagree with the board of directors over an issue, it could possibly vote to remove you. If you formed an LLC, you would need no board of directors. You could also choose to have as many or as few owners as you like.
By forming a corporation, you must have yearly meetings, take minutes at these meetings, and deal with many other regulatory hassles. If you form an LLC, there are fewer government requirements.
Choosing any business structure without doing your homework. Seeking legal advice is recommended.
Failing to complete all necessary documents before filing.
Using downloadable, one-size-fits-all templates. State laws vary and can change. Online templates are often inaccurate.
Frequently Asked Questions
- Would my business qualify for S-Corp status?
The IRS lists several S-Corp requirements that include having less than 100 shareholders and several other obligations.
- What are the differences between an S-Corp and a traditional corporation (C-corp)?
The main difference is that S-Corp businesses don't face double taxation, but they do still have limits.
- I heard incorporating in Delaware provides better benefits. Is this true?
There are many benefits to incorporating in Delaware, but there are drawbacks, too. You should speak with a legal expert to figure out the smartest move for your company.
- How much does it cost to file for a corporation?
This price varies by state, and it can go well over $400 in some areas. You can review online lists of corporate filing fees by state.
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