The advantages and disadvantages of a corporation must be considered before you incorporate your business. Some of the biggest benefits of this business structure include access to funding, limited liability protections, and an unlimited lifespan. In terms of disadvantages, corporations are required to observe strict formalities and may be subject to expensive double taxation.
Consider how you want to raise capital
- Incorporation is the legal process used to form a corporate entity or company.
- This is generally defined before creating the partnerships in the partnership contract or deed.
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- Owners must prepare a series of documents, including the bylaws and the articles of incorporation, before the local government will consider the application.
- An advantage of corporations for their shareholders is that corporations allow their shareholders to transfer their ownership without restrictions.
Even the annual tax deadline for C-corporations is a month earlier than it is for private citizens. It is a complex system that often requires the help of a Certified Public Accountant to navigate. If a business operates as a C-corp, then the officers of the company are responsible for the daily operations. Shareholders in this structure have an entitlement to their equity percentage of ownership for voting, dividend distribution, and similar rights in this area. Incorporation creates clearly-defined roles for every member of the leadership team to follow, including the areas of responsibility for the Board of Directors. Most are chartered based on whether or not they can issue stock or make profits.
What are the Advantages and Disadvantages of Incorporation?
In addition, shares traded on public exchanges are much more liquid markets compared to other means of selling a business. A corporation is a business that is recognized by the state as a legal entity separate from its owners (also known as shareholders). A corporation can be owned by individuals and/or other entities, and ownership is easily transferable via the buying and selling of stock. Since a corporation is its own legal entity, it can enter litigation on its own, which protects its owners from personal liability in the event of legal action. Small business owners have a variety of options when establishing a legal structure. Although there are several reasons why incorporating can be advantageous to your business, there are a few disadvantages to be aware of as well.
Adherence to Corporate Formalities and Functions:
The board of directors comprises a group of individuals who are elected to represent shareholders. They are tasked with making decisions on major issues affecting the shareholders, and they also create policies to guide the management and daily operations of the corporation. For-profit entities form the majority of corporations, and they are formed to generate revenues and provide a return to their shareholders, according to their percentage of ownership in the corporation. To form a corporation in the U.S., it is necessary to file articles of incorporation with the state in which it will be registered.
Management Structure in a Corporation
In general, the creation and management of an LLC are much easier and more flexible than that of a corporation. Still, there are advantages and disadvantages to both types of business structures. It’s not legally required to get professional help to incorporate a business.
- A corporation must present all facts during any legal proceeding, even if the evidence implicates its own behavior.
- The company pays off its creditors and distributes any remaining money to the shareholders.
- The tradeoff is that they are limited to 100 shareholders and face some tax constraints like being limited to paying their employees a salary the IRS deems reasonable.
- After that come your corporate bylaws, stock certificates and shareholder agreements.
- This feature is applied in a different manner when it comes to different kinds of corporations, such as an S-corp or a C-corp.
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However, this also means that a corporation, as a separate entity, will have to pay its taxes. Once a corporation is taxed, it can distribute any earnings to its shareholders in the form of dividends. Its shareholders will only be liable for the corporation’s debts limited to the value of their shareholding or their capital invested in the corporation.
Pros and Cons of Forming a Corporation
The owners, called shareholders, are not personally liable for the debts or obligations of the business. If you are passionate about owning and operating your business, forming a corporation is usually a poor choice. Individuals cannot personally own a corporation, as these entities are separate from their owners. Also, a corporation is governed by a board of directors instead of an individual owner.
LLCs are under the jurisdiction of state law, so the process of forming an LLC depends on the state where it is being filed. A Corporation is a separate legal entity that not only exists apart from its owners but has a perpetual life. If one or more owners leave the company or die, the business continues indefinitely, until it is dissolved. That’s a different situation advantages of being a corporation than for a Sole Proprietorship or Partnership, which ends with the death of an owner or owners. With a Corporation, shares of ownership can be sold, gifted, or bequeathed to others. A corporation and its management have what is called a «Fiduciary responsibility», that is the corporation and its management must function for the best interest of its shareholders.
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- Because it is privately-held, a shareholder cannot sell their shares in an open marketplace to the general public.
- It continues to exist even after you’re gone as if nothing has changed.
- While forming a corporation can be very beneficial, you won’t have control of your company the way you would with a sole proprietorship.
- They can enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
Disadvantages
In fact, many individuals and partners incorporate without any professional guidance. You can look at it like filing your personal tax returns – it can be time-consuming and a hassle, but you probably can do it yourself if you’re so inclined and willing to do the work involved. Depending on how you look, having to file taxes as an independent entity from its owners can be a real advantage for corporations. One of the biggest advantage that taxation provides to a corporation is its ability to shed capital losses.
- You do have the freedom to pursue the initial documentation in whatever state you prefer, there are registration processes to follow to do business in any state outside of your home one.
- For example, if a client gets injured on business property, they can lay claim to the business assets and the owners’ personal assets as payment for their injuries.
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- A corporate can be formed as a for-profit or a not-for-profit entity.
- An accountant or tax lawyer will be able to crunch the numbers with you and figure out which is the better option for your company.
- Recently formulated corporate bodies like the S corporation restricts the transfer of shares from one owner to another.
- Businesses receive incorporation through a different process in all 50 states.