Advantages and Disadvantages of a Corporation
Whether to incorporate or not is one of the critical decisions to take when you start a business. Which is better, LLC, Sole proprietorship, or a corporation? Different questions keep hovering in mind the possible pros and cons of each business model. The answers depend on your choices, preferences, and prospects of business growth in the future. Forming a Corporation has its own set of advantages and disadvantages in terms of legal structure and liability. If you are having thoughts on the Advantages and Disadvantages of a Corporation, these considerations might be worthwhile.
What Is a Corporation?
A corporation is a business entity independent of the owners and does not pass on its taxes or liability to its owners. It’s a legally bound entity that sells parts of itself to its owner through stocks or shares to contribute to that stock's current share price.
The corporation and its management must function for the best interest of its shareholders. All the people in a corporation must act as a single business entity, whether public or private. The primary goal of a corporation is to get the highest net return for its investors or shareholders.
What are the Advantages of a Corporation?
Several advantages of a corporation cover limited personal liability, easy transference of ownership, business continuity, better access to capital, and tax benefits. These are also described in brief in the following segments.
1. Protection Against Legal Liability
Law considers a corporation as a separate business entity. While registering themselves as a corporation, the owners must go through several legal formalities. Once the owner(s) complete the incorporation process, they can also benefit from a limited amount of legal liability for the corporation's business activities and debts.
2. Easy to Find Investors
The corporation is recognized as more than a sole proprietorship and partnership. It's also a sort of business entity that's protected against some pitfalls. For example, if a corporation is sued, the investors can get benefits and compensation since a corporation is bound legally to the state.
The corporation's ability to issue stock is a strong selling point to those willing to invest capital in a business venture. Investors have a chance to recover their money.
3. Well-maintained Structure
A corporate business has a more established structure in terms of power and management structure. The board of Directors, Officers, managers, and shareholders are the key factors other organizations and investors draw their attention to a corporation. Each person is well-aware of their responsibilities to make a practical environment.
4. Business security
Ownership in a corporation is based on a stock percentage, offering much more flexibility than other entity types such as LLCs or sole proprietorships. Transferring ownership and perpetuating the business for the long term is easily achievable in a corporation. If the owners decide to sell this business entity, or the owners decease, the ownership can easily be transferred to someone else through stocks or legal intervention.
5. Tax benefits
Forming a Corporation can benefit from reduced Taxation depending on how the revenue is generated and distributed. Any information that is calculated as owner salary is subject to self-employment tax as if in the case of a sole proprietorship. On the other hand, in a corporation, the income is designated in the name of the business entity only. The remainder of the business dividends will be taxed at a different level rather than self-employment tax.
What are the Disadvantages of a Corporation?
Forming a corporation is not for everyone, it could lead to extra and unbearable expenses costing you more time and money. Before becoming a corporation, you should be aware of the common or rare disadvantages of a corporation.
1. Expensive in terms of Time & Cost
The biggest disadvantages of a Corporation are the application process and paperwork. Registering to the state's Secretary means you'll have to visit the office several times and fulfill the formalities while preparing the corporation documents. It can be both expensive and time-consuming.
Also, corporations are expensive to form as you will likely need a lot of startup capital to maintain it and operate it. Additional taxes are another pitfall of a corporation as you'll need extra financial backup other than filing fees. To outweigh the disadvantages of a corporation, it's better to seek professional guidance to overcome the implications of creating a corporation.
2. Lengthy application process
Getting done with filing your articles of incorporation with your secretary of state can seem easy. But the entire process of collecting documents and incorporating them is often lengthy and pesky. You will likely have extensive paperwork to go through to correctly specify and speculate document details of your organization and its ownership. Abiding by the corporate bylaws and maintain them can be complicated when you don’t know in detail.
3. Stricter Protocols and Structure
Besides the lengthy application process, you may have to face stringent laws and protocols in order to form or operate a corporation. Adhering to the legal requirements running your business can pose particular challenges at times. Maintaining a corporation structure becomes a more energy-consuming process. You are bound to follow many formalities and heavy regulations to maintain the minimum standard for your corporation.
4. Following Corporate Formalities
All corporations are required by law to observe a number of corporate formalities to ensure that the corporation is operating as a separate entity, independent of the business's owners. These steps include holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation's ongoing financial independence. See "The Basics of Small Business Incorporation" to learn more.
5. Doubled Tax Liability
As a corporation, you may have to deal double taxes; the corporation itself is taxed for any profits earned, including dividends earned by any individual stockholder in the corporation. This happens mostly in the case of larger corporations. However, this may not necessarily be an issue for the stockholders and owners of smaller corporations, who work for the business itself on paid salaries rather than dividends.
Before forming a corporation, decide if big your company is and how many stockholders will join in. Speculate the expenses and capital required to operate it. Usually, a small company can help you reap maximum benefits. Finally, consult an attorney or accountant to help you with where you can save your money and time during the paperwork.