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Advantages and Disadvantages of a Corporation

If you’ve ever dreamed of incorporating your business, you’re in good company. For many business owners, incorporating their sole proprietorship or general partnership comes with many benefits.

For starters, setting up a corporation means you can kiss most personal liability goodbye. What’s more, incorporation signals to investors that you’re serious about taking your patented 5-in-1 vegetable chopper into every kitchen. 

Can you say, hello, more capital?

Although incorporating comes with many benefits, there are few drawbacks. In this article, we’ll highlight what are the advantages and disadvantages of a corporation. We’ll fill you in on everything you need to know in case you’re thinking about taking your small business to the next level and are interested in learning how to start a corporation.

Advantages of Incorporating

In many ways, incorporating your business is similar to rebranding. For instance, if you run a small “mom-and-pop” chocolate shop, incorporating signals to the world that your prized truffles are ready for the big stage.

But increased exposure isn’t the only benefit of incorporating. Below, we’ve broken down the major advantages of setting up a corporation:

Personal Liability

In the unincorporated business world, bankruptcy, massive debt, and legal issues are akin to financial kryptonite. This is because the owners are on the hook for any legal or financial obligations.

But when you incorporate your business, you’re effectively signing an agreement stating shareholders can’t be held personally liable for any financial or legal judgments relating to the business. 

Even if the corporation’s sued, shareholders are protected—a major boon especially if the corporation doesn’t have the assets for repayment.

That said, there are a fewinstances where shareholders may still be on the hook for repayment. These include:

  • A shareholder personally guaranteeing the business debt
  • Instances where corporate legal formalities weren’t followed

In general, however, incorporating allows owners to operate their business without the stress of having to personally repay the business debt in the unfortunate case they arise.

Access to Funding

In a perfect world, every business—from a small sole proprietorship to larger corporations, and LLC or limited liability company—would have ample access to funding. The problem, however, is that unincorporated businesses lack the business structure to broaden their investor pools and raise capital. 

On the other hand, corporations have much greater access to funding.

Here’s why:

  • Corporations transfer ownership through shares – One of the biggest benefits of incorporating is the ability to sell shares to stakeholders. If the corporation’s doing well, shares provide a useful funding stream.
  • Corporations can borrow – Just as people can borrow money from lending institutions, so too can corporations. This is because, in the eyes of the law, corporations are their own separate legal entity. What’s more, because of personal liability protection, borrowing money is a relatively stress-free process.

Tax Benefits

If the old adage “the only things certain in life are death and taxes” is true, it’s especially true in the business world—at least when it comes to taxes.

But though all businesses must pay taxes, setting up a corporation ( closed corporation or public corporation) gives you access to many corporate tax benefits or tax advantages.

For starters, incorporating means you can apply for an S Corp tax ID. Under this designation, you aren’t subject to double taxation (a feature of a C Corporation), meaning you’re not taxed at the corporate level—only at the owners’ personal level. If you want to learn more, we’ve also written in detail about the differences between a C vs S Corporation as well as the differences between an LLC vs corporation

Additionally, incorporated businesses enjoy the following tax privileges:

  • Deferred tax payments
  • Social Security tax breaks
  • Benefit deductions
  • Expense deductions

Disadvantages of Incorporating

While setting up a corporation comes with many corporation advantages, there are a few disadvantages. These include time and money requirements and financial and legal restrictions.

Let’s break down these disadvantages further.

Time and Money Requirements

It’s no secret that setting up a corporation takes a lot of work. Not only do you have to raise enough funds, but you also have to take on a second job: filling out paperwork.

In terms of the latter, the paperwork involved in setting up a corporation is extensive. The documents required to incorporate include:

  • Articles of incorporation
  • A business name reservation form
  • A corporate bylaws form
  • A shareholder agreement
  • Stock certificates

Needless to say, if you’re thinking of incorporating, be prepared to spend many weekends with a cup of coffee and a stack of paperwork. 

Fortunately, through smart, personal tech solutions, such as form filling by voice and convenient document uploading, you can take the work out of paperwork.

Financial and Legal Restrictions

While incorporating relieves you of personal liability, it also opens up the door to financial and legal restrictions.

In many cases, these financial and legal restrictions are related to the business’s structure. For example, while C Corporations can have an unlimited number of shareholders, S Corporations are limited to 100. Furthermore, for small corporations, the law prohibits two people from the same family sitting on the board of directors at the same time.

Additional financial and legal restrictions include:

  • Double taxation (only for a C Corp EIN)
  • The inability to deduct dividends from tax payments
  • The obligation to file annual reports (these can be expensive)
  • A loss of power when it comes to individual ownership

Reasons to Incorporate

As stated above, while incorporation comes with many benefits, it may not be for every business owner.

That said, the people who benefit the most from incorporation is the business owner looking for the following:

  • Personal liability protection
  • Increased access to capital
  • Increased credibility for their business
  • Perpetual existence
  • Corporate tax benefits or tax advantage

To avoid having to set up a corporation in person, simply fill out this form to apply for a corporation online right now.

Sources:

Investopedia. What Are the Sources of Funding Available for Companies? https://www.investopedia.com/ask/answers/03/062003.asp

Upcounsel. Advantages and Disadvantages of a Corporation: Everything You Need to Know. https://www.upcounsel.com/advantages-and-disadvantages-of-a-corporation

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