Key Takeaways

  • The main benefits of a corporation include limited liability, enhanced credibility, easier access to capital, perpetual existence, and flexible ownership transfer.
  • Corporations can attract investors through stock offerings, scale quickly, and deduct various business expenses and employee benefits.
  • Additional advantages include potential tax planning opportunities, separation of personal and business assets, and increased ability to raise large amounts of capital.
  • However, corporations also face disadvantages such as double taxation (for C-corps), complex regulatory requirements, ongoing compliance obligations, and potentially high formation and operational costs.
  • Special forms like benefit corporations focus on both profit and positive social/environmental impact, which can attract socially conscious investors and customers.

You should learn what is corporation advantages and disadvantages before choosing to incorporate your business. If you find your business growing, you might want to consider converting to a corporation, as it can help you raise capital, attract new shareholders, and provide limited liability protection for owners.

Advantages vs. Disadvantages

There are many advantages to operating a corporation. With the many advantages, there are also some disadvantages to keep in mind. Before you choose to incorporate your business, you should think of what your goals and objectives are for your business. Do you have short-term and long-term goals in mind? Do you want to expand your business to offer stock to the public? If so, then a corporation would be a good choice for you. But, if you want to operate a small business without having investors participate in the business, then operating a different business structure might be better for you. Perhaps you want to operate a small business S corp as opposed to a C corp, as the S corp can provide you with some additional benefits, particularly for tax purposes.

Advantages

Some of the many advantages of operating a corporation include the following:

  • Limited liability
  • Source of capital
  • Ownership transfer
  • Perpetual existence
  • Cost of benefits
  • S corp election

One of the most significant advantages of operating a corporation is the limited liability protection offered to shareholders. This means the shareholders cannot be held personally liable for the obligations of the business.

A corporation can increase its capital by going public and selling its shares to the public. If a company does decide to go public, it must register all shares it plans on selling with the Securities and Exchange Commission (SEC).

Ownership in a corporation can be freely transferred by simply transferring one’s shares to another. However, keep in mind that it might be a bit more difficult if the company is privately held. A corporation has a perpetual existence until it is liquidated. The corporation won’t be terminated just because one shareholder wants to sell his or her shares in the company, as is the case with most LLCs.

Corporations can also deduct the cost of benefits it offers to employees and officers. Such benefits generally include all fringe benefits, such as medical and dental insurance, life insurance, transportation assistance, and more. As previously noted, you can elect to be treated as an S corporation. If you operate as an S corp, your business will not need to pay corporate income tax. Instead, the profits and losses are reported on the shareholders’ personal tax returns.

Additional Benefits of a Corporation

Beyond the commonly known advantages such as limited liability and perpetual existence, corporations offer several additional benefits that make them attractive for entrepreneurs, investors, and growing businesses:

  • Enhanced Credibility and Brand Trust:
    Incorporating can significantly boost your company’s credibility in the eyes of customers, suppliers, and financial institutions. The “Inc.” or “Corp.” designation often signals a stable, well-structured business with a formal governance system.
  • Increased Fundraising Opportunities:
    Corporations can issue various types of stock and attract both private and public investors. This flexibility in raising capital makes it easier to scale operations, launch new products, or enter new markets.
  • Tax Planning Flexibility:
    While C corporations are subject to double taxation, they can take advantage of a wider range of deductions and credits. Business expenses, employee benefits, and even certain fringe benefits may be tax-deductible, allowing for more strategic tax planning.
  • Separation of Ownership and Management:
    Shareholders own the corporation but are not directly involved in day-to-day operations. This separation allows professional managers to run the company efficiently and makes ownership more liquid and transferable.
  • Potential for Employee Incentives:
    Corporations can offer stock options, profit-sharing plans, and other equity-based incentives to attract and retain top talent. These programs can also align employee interests with company performance.
  • Opportunities for Growth and Expansion:
    The corporate structure is ideal for businesses planning to expand nationally or internationally. Access to large-scale financing, scalability, and the ability to form subsidiaries or merge with other companies make corporations particularly suited for high-growth enterprises.
  • Attraction of Socially Conscious Investors (Benefit Corporations):
    Businesses that register as benefit corporations commit to generating positive social or environmental impact alongside profits. This dual mission can appeal to a growing segment of impact investors and consumers seeking socially responsible businesses.

Disadvantages

Some of the disadvantages of operating a corporation include the following:

  • Double taxation
  • Excessive filings
  • Independent management
  • Several corporate formalities

One of the biggest disadvantages of a corporation (C corp) is the double taxation implication. If you operate a C corporation, your company will have to pay corporate income taxes. Thereafter, if dividends are paid out to shareholders, those shareholders will need to pay taxes on such dividends. S corps, however, don’t pay taxes twice, as the S corp operates as a pass-through entity.

Another disadvantage is the complex filing rules for corporations. Specifically, forming or dissolving a corporation can be costly and time consuming. There are usually several forms required for operating a corporation and these forms must be filed on an ongoing basis.

Some filings include registering with the state of incorporation at the time of formation, filling out stock documentation if the corporation is publicly offering shares, submitting stock certificates for each shareholder at the time of formation or when a new shareholder enters the business, and holding meetings while also keeping meeting minutes for such meetings. Another potential requirement are the corporate bylaws, which must specify all important decision making processes of the corporation.

The corporation could also incur technology costs and the costs associated with purchasing or leasing equipment and supplies. Keep in mind that additional federal, state, and local rules and regulations exist, meaning that you could be required to file additional documentation and pay applicable fees that come with it. Failure to abide by such rules could result in high penalties.

Other Limitations and Considerations

While the benefits of a corporation are substantial, it’s equally important to consider additional drawbacks beyond those already mentioned:

  • More Regulatory Scrutiny:
    Corporations, especially publicly traded ones, face extensive oversight from federal and state agencies. This can include periodic reporting, shareholder meeting requirements, and compliance with securities laws.
  • Costs Beyond Formation:
    Beyond initial filing fees, corporations often incur ongoing costs such as annual state fees, franchise taxes, and professional services fees for accountants, attorneys, and compliance consultants.
  • Potential for Loss of Control:
    As a corporation grows and brings in more shareholders or investors, original founders may lose significant control over decision-making, especially if they do not maintain a majority stake.
  • Public Disclosure Requirements:
    Corporations must often disclose financial and operational information to the public or to shareholders, which can limit privacy and strategic flexibility.

Frequently Asked Questions

  1. What are the biggest benefits of a corporation for small businesses?
    The main benefits include limited liability protection, enhanced credibility, easier access to capital, and perpetual existence — all of which can support growth and long-term success.
  2. How does a corporation raise money?
    Corporations can raise capital by issuing stock, seeking venture capital investments, or going public through an IPO, which is not possible for sole proprietorships or partnerships.
  3. Do corporations pay less tax than other business types?
    Not always. C corporations face double taxation, but they can also benefit from lower corporate tax rates, strategic deductions, and reinvestment options. S corporations avoid double taxation through pass-through taxation.
  4. What is a benefit corporation?
    A benefit corporation is a legal structure that allows a business to pursue social or environmental goals in addition to profits, appealing to impact investors and socially conscious consumers.
  5. Is forming a corporation worth it?
    For companies planning to scale, attract investors, or build long-term market presence, the advantages usually outweigh the drawbacks. However, smaller businesses may prefer simpler structures like LLCs or partnerships.

If you need help learning more about the advantages and disadvantages of a corporation or forming your 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.