What Is Corporation Advantages And Disadvantages: Everything You Need to Know
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.3 min read
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.
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.
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.
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.