Corporation Advantages and Disadvantages: A Step-by-Step Guide

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Starting a business can be exhilarating, gratifying, and even a little intimidating.

Before you know it, you’ve become your own boss. You answer to only yourself.

The problem?

Well, you also have to make decisions which could ultimately make or break your business.

For example, should your business be a corporation or maybe some other form of business?

Sounds confusing, right?

Fortunately, I’m Sam Mollaei, Esq., Business Lawyer, and I can help you figure out corporation advantages and disadvantages.

Contact me via email sam@mollaeilaw.com today, and we’ll figure it out together.

Let's get started...

 

What is a Corporation?

A corporation is a type of legal business entity that is recognized by the government as a separate entity from its owners.

Most new and prospective business owners are familiar with corporations because it provides a business with limited liability.

Basically, this means it limits the connection between personal liability and business debts. This appeals to people because it translates into one simple statement – less paperwork.

However, it’s important to keep in mind there is so much more to establishing and maintaining a corporation than the initial decision. For example, you have to maintain spotless records and manage a complicated corporation tax refund.

What being a successful corporation boils down to is being organized. If you aren’t organized, it won’t work.

I can answer any questions you have about a corporation when you email sam@mollaeilaw.com

 

Advantages of a Corporation

The biggest advantage of a corporation is the protection a corporation provides to your personal assets.

Making this decision will draw a clear line that separates what belongs to your as a business owner and you as a person.

This way you don’t have to worry about anything going wrong with your business impacting your personal assets as well.

Incorporating your business adds credibility to your business. It is also protects your name as well. When customers, partners, and even vendors see you’re a legal corporation, they have a sense of security.

Just the title can make people so much more comfortable associating themselves with you. This alone is a benefit worth taking into serious consideration as the key to a successful business is making sure your customers and partners are comfortable doing business with you.

A third benefit to corporations is perpetual existence. With a partnership or sole proprietorship, the business just ends if the owner of the business dies. Additionally, some LLCs dissolve if a shareholder dies.

A business that is incorporated, on the other hand, can continue to exist.

While an LLC isn’t really any different tax wise than a sole proprietorship, being a corporation will offer you some flexibility. For example, if you claim S tax status, you can avoid double taxation.

Both LLC and corporations, however, offer the opportunity to deduct a number of typical business expenses such as salaries as well.

 

Disadvantages of a Corporation

The main disadvantage of a corporation is taxation.

There is no denying a corporation will offer your business all sorts of benefits. It, however, also brings a long some downsides.

As a business owner, you need to be aware of both the good and the bad.

This is the only way to make the best decision regarding whether or not a corporation is right for your business.

A corporation can make taxes a little scary. As a corporation, you will be required to pay taxes on your profits if your income is distributed to the shareholders.

Then, the shareholders also have to pay taxes on their individual returns. While you, as the corporation, only have to pay taxes once. This is technically considered double taxation. This, unfortunately, is going to scare prospective business owners should you decide to sell the business one day.

There is, however, an easy solution to this problem. Simply selection “S Corporation” tax status instead of “C.” This will make it possible for your business to avoid the double taxation.

 

Corporation Advantages and Disadvantages

There are several corporation advantages and disadvantages that must be considered.

It’s natural to have a difficult time making the decision between forming a corporation or forming another type of business. It’s a big decision.

If everything works out, this business is going to have you set for life. So, you want to make the right decision.

Let’s take a look at a short list of the pros and cons of a corporation...

 

Advantages of a Corporation

  • Shareholders are typically not liable for debt or judgment passed against the corporation
  • Corporations can raise additional money by selling shares within the corporation
  • Cost benefits provided to corporate employees can be written off as deductions
  • Some corporations can use S corporation status to make them exempt from federal income taxation

 

Disadvantages of a Corporation

  • Creating a corporation is more expensive than any other type of business
  • Creating a corporation is also more time consuming
  • Government agencies tend to monitor corporations, which could mean more paperwork

If you’re not sure how to deal with the advantages and disadvantages of corporations, email me at sam@mollaeilaw.com and I’ll help you straighten it all out.

 

Sole Proprietorship vs Corporation

There are several different types of business structures for you to consider.

For now, let’s take a look at the difference between sole proprietorship and corporation.         

If time and money are an issue, sole proprietorships and partnerships could be the way to go. After all, they cost significantly less to set up and start managing than a corporation does.

While there are formation fees, filing fees, and annual state fees, you will have a lower insurance cost to balance it out.

With the right business lawyer helping you out, however, incorporating your business can be a fast and affordable task. If you decide it is the right option for you.

When it comes to sole proprietorships and partnerships, there aren’t as many formalities to worry about.

You have to file legal documents with the state in order to create a corporation. There are also all sorts of formalities your corporation has to adhere to.

If these formalities are not adhered to, you lose the liability protection which is the whole point in opting for a corporation in the first place.

However, it’s worth noting keeping up with the corporate formalities required of a corporation isn’t difficult. It is just a bit time consuming.

For some, it requires more time than they are willing to put in. This is where it can be beneficial to have a business lawyer help you out.

By comparison, you don’t need some formal organization plan or procedure in order to start and operate a partnership or a sole proprietorship. You aren’t even required to have a written agreement, although I highly recommend it.

Email me at sam@mollaeilaw.com if you have any questions.

 

LLC vs Corporation

Both aspiring business owners and business owners who want to change their business structure are going to have one big question they need to answer – corporation or LLC?

Now, there’s no denying there are many similarities between the two business structures. There are, however, a number of differences that set them apart.

Better understanding how the two are similar and different could be the information you need to help make the choice.

LLC and corporations have a significant amount of similar qualities.

With both types of business structures, the owner does not have a personal responsibility for the debts and liabilities of said business. This makes both options extremely appealing because it serves as a way to protect you as an individual if something bad were to happen to the business.

Both also have some requirements when it comes to the state. For example, you will have to file annual reports and pay certain fees regardless of which option you choose.

Now, let’s talk about the differences between LLC and corporation. After all, the differences are ultimately going to help you decide which is the better business structure for you and your needs.

The IRS has specific restrictions when it comes to corporation ownership. These same restrictions are not included with LLC. What are these restrictions, you wonder?

For starters, LLCs do not have shareholder limitations and corporations do. LLCs can also have members that are not U.S. citizens and corporations cannot.

Furthermore, S corporations cannot be owned by C corporations, other S corporations, LLCs, trusts, or partnerships. LLCs don’t have to worry about this either.

Formalities and differences aside, only you can decide which business structure is the better option for you. Fortunately, a good business lawyer can help make the decision a little easier.

After all, trying to decipher all of the differences between LLCs, trusts, partnerships, S corporations, and C corporations is enough to make anyone’s head spin. Let me help.

 

Corporation Tax Rates 2017

The corporate income tax rate 2017 is 35% at the federal level as well as a 4% tax at the state and local level.

The 4% is an average, so your state may vary in terms of their own corporation tax rates.

 

Piercing the Corporate Veil

Piercing the corporate veil is a term used for when a court holds the owners of an LLC or corporation personally responsible for the business debts.

In most cases, you as a business owner are protected from any business debts and liabilities by your LLC or corporation status.

But there are some situations in which a court will hold you personally responsible and pierce the corporate veil.

Corporations with one or a few owners and small LLCs are the most likely to have the corporate veil pierced and end up personally liable for the business.

When the court allows piercing of the corporate veil, a creditor can come after you home, investments, bank accounts, and other assets to pay the debt.

This is a scary possibility, so let’s look at when this may happen:

  • You’ve created no real separation between you and your company. If you mix the finances of your business and your personal ones, you’ve removed that separation. This is simple as paying business bills from a personal checking account.
  • You (or another shareholder) did something that is considered fraudulent or wrongful. This may be acting dishonest or recklessly or even just acquiring work knowing that your finances at the moment won’t allow you to pay for it.

Here’s what a court looks at when considering whether or not to pierce the corporate veil:

  • If fraudulent behavior was involved.
  • If your business broke corporate formalities.
  • If your business wasn’t established with enough capital in the first place.
  • If your business is controlled by one person or a small group of people.

Piercing the corporate veil is something that can happen to you and it can be devastating.

Work with a business lawyer to set up your business correctly from the beginning and then let one help you stay compliant throughout the year.

If you have any questions about piercing the corporate veil or how you can protect yourself, email me at sam@mollaeilaw.com today.

 

Conclusion

Sam Mollaei, Esq., Business Lawyer

Sam Mollaei, Esq., Business Lawyer

Launching a small business can be an exciting venture. A large portion of the time, however, launching it as a sole proprietorship can be a big mistake.

In taking this approach, there is no clear line to define the difference between you and your business.

While this isn’t a huge problem if your business is really successful – it can cause big problems if your business has any issues.

A sole proprietorship provides you with absolutely no protection if someone were to file any sort of lawsuit against your business. Basically, this means the individual who filed the lawsuit would be able to come after you and your business.

As an entrepreneur, a corporation or a Limited Liability Company (LLC) are always going to be the better options as they will offer you way more advantages than a sole proprietorship ever could.

Sure, they come with a few downsides. But – in life – every good thing has a few rough edges.

► When you’re ready to take the next step and incorporate your business, email me at sam@mollaeilaw.com to get started.