Start Your U.S. Business Confidently

Show Me How
50% Complete

Step 1 of 2: Start Your Application

Privacy Policy: Your information is 100% safe and secure

Disadvantages of Corporations (3 Things You NEED to Know!)

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 can help you figure out advantages and disadvantages of Corporation

If you have any questions, you can email me at sam@mollaeilaw.com

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. This is one of the disadvantages of corporation.

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 you 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 also protects your name. 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 Corporation

The main disadvantage of corporation is taxation.

There is no denying that a corporation will offer your business all sorts of benefits. It, however, also brings along some downsides such as corporation disadvantages.

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 select “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 advantages and disadvantages of 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 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 manage as compared to a corporation.

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 that 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.

Understanding how the two are similar and different could be the information you need to 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. This is one of the disadvantages of corporation you may face.

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 your home, investments, bank accounts, and other assets to pay the debt. This is one of the worst disadvantages of corporation.

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 from corporation disadvantages, email me at sam@mollaeilaw.com today.

LLC Benefits

Incorporating your business is one of the smartest business decisions you can make for your business if you haven’t done so yet.

Incorporating immediately sets you up for success.

Making your business a Limited Liability Company (LLC) or a Corporation offers numerous benefits.

If you have any questions about this, email me at sam@mollaeilaw.com

Here are five top 5 advantages of incorporation…

 

What is Incorporation?

Incorporation is the process of setting up a business entity — either as an LLC or as a Corporation.

Incorporation is in essence a legal as well as a strategic business process.

When you incorporate your business, you make it a separate legal entity. What this means is that you and your business are separate entities with different rights and obligations.

Making your business a separate legal entity should be one of your primary goals.

 

What Are the Types of Incorporation?

You can either incorporate your business as an LLC or a Corporation.

Your choice of business structure largely depends on the vision, goals, and strategy you have for your business.

There are a number of different entity types and many factors to consider when determining the right business structure.

The decision to choose the correct business structure is important because the type of business you create determines the type of applications and forms you will need to file.

There’s also very important personal liability and tax implications for each business type.

A business lawyer can help you choose the right entity by raising all the necessary considerations, and also by relieving the burden of organizing, drafting, and filing proper documentation with state authorities.

 

What’s the Difference Between LLC and Corporation?

An LLC is a business whose owners have limited personal liability for the liabilities or obligations of the LLC.

Just like the name states, LLCs provide their owners and investors with limited liability for company debts. This means that your personal assets remain untouchable to cover business debts, claims or lawsuits to a greater extent than what you invested in the company.

This makes LLCs a more attractive investment because if the business falls through or has a low profit period, the investor’s possessions, such as a car or home, cannot be touched by creditors such as lenders or landlords.

You can avoid double taxation. Double taxation means that the corporation and the investor’s business profits experience taxation. In an LLC, the initial profits are not considered income, and therefore, you are not required to pay self-employment taxes on them.

On the other hand…

Corporation is also an independent legal entity, separate from the people who own, control, and manage it.

Corporations can enter into contracts, incur debts, and pay taxes apart from its owners. In other words, the Corporation itself, not the shareholders who own it, is held legally liable for the actions and debs the business incurs.

However, corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements.

Because of these corporation disadvantages, corporations are generally suggested for established, larger companies with multiple employees.

It is always advisable to discuss your business goal, vision, and strategy with a business lawyer like myself so I can help you choose the right type of incorporation.

Even when you settle for an LLC, you still have to decide which legal identity best fits your business. A good lawyer will help you make these decisions.

At Mollaei Law, I’m equipped to assist you in choosing the right option. Contact me here.

While every form of incorporation offers unique benefits, there are certain critical benefits incorporation as a whole offers.

Here are 5 top advantages of incorporation:

1. Incorporation Protects Personal Assets

While we might not want to think about it, anything can go wrong in a business.

Your business might under-perform, it might fail to pick up, or an unforeseen risky event might occur.

Generally, the list of the bad things that might happen to your business is endless. Yes, I know, entrepreneurs are the most optimistic people in the world.

But ask any long-term successful entrepreneur, they will tell you that they had to overcome humongous challenges before succeeding.

One of the reasons they were able to overcome such challenges is because they had covered their bases. They had protected themselves. Incorporating your business is one of the ways you can protect yourself. Recovering from your losses is likely to be much easier if the loss did not affect your personal assets.

Both Corporations and LLCs offer you an opportunity to protect your personal assets. With the right legal advice, you can properly structure your business to enjoy limited liability status.

What this means is that your rights and obligations would be different from that of your business. Business debtors therefore cannot claim your personal property in case the business is unable to pay them.

 

2. Incorporation Offers Tax Benefits

Minimizing your expenses will enhance the odds of your business being successful, as well as magnify your profits, in case your business is already profitable.

Reducing your tax liability, or generally cost, is one of the most effective ways of reducing your business expenses.

Fortunately, incorporating your business offers you an opportunity to enjoy tax benefits that may greatly reduce your tax costs.

Tax expense deduction is definitely one of the largest benefits of incorporation. Incorporation allows businesses to deduct fringe benefits, namely travel, medical, or any other daily business expenses.

Numerous savings can be made by deducting medical insurance that you pay for yourself or your employees. Medical premiums are 100% deductible for incorporated businesses.

In addition, incorporating your business is likely to reduce your tax expenses. As a rule of thumb, self-employed are charged higher income tax than incorporated businesses.

Therefore, whether you’re a small business owner, home worker, or a self-employed person, you should consider incorporating your business as this would increase your disposable income.

In addition, incorporation offers social security tax deductions that are beneficial to a self-employed person. Every income earned by a self-employed person is viewed as a personal income or salary.

In addition to paying income taxes, the self-employed person also pays social security taxes. Incorporation will enable you pay social security taxes only on the portion of the income you assign yourself as salary.

Spreading or deducting your losses is another important tax benefit of incorporating. Spreading losses involves carrying forward the business losses thus reducing the tax expense for the years the losses are spread.

If, for instance, a business incurs a loss of $50,000, it can spread the loss to a period of three years. The tax expense will be lower during the period the loss is spread, even if the business makes profit.

You can also deduct losses from your income by writing off inventory and/or item sold at partial or full loss. Deducting your losses is a wonderful way of staying afloat during those days your business is struggling or not making enough profit.

New business owners should particularly consider exploring this option since businesses usually struggle during their first few years.

In addition to deducting your losses and fringe benefits, incorporation may allow you to deduct certain expenses that you’re already incurring on a daily basis.

A good example is your vehicle expenses. You might be already driving to work, to meet clients, or even to drop items to your customers.

While you might view these expenses as personal, they do actually qualify for a full or partial deduction since you incurred them in the normal process of running your business.

 

3. Incorporation Adds Credibility to your Business

Credibility can be the difference between success and failure of a business. Customers, suppliers, shareholders, and even potential partners will quickly work with a business that they consider credible.

Incorporating your business is the surest way of adding credibility to your business.

It has been proven that business stakeholders prefer to work with businesses that have names ending with LLC or Inc.

In addition, many states prohibit other businesses from using an already incorporated name.

Therefore, incorporating your business not only adds credibility to your business, but also protects it. Imagine a situation whereby your business shares a name with another unscrupulous business. The credibility of your business can be damaged beyond recovery.

Adding an LLC to your business enhances and protects the credibility of your business beyond the city or county you operate. Partnership and sole-proprietorship are in most cases registered at county or city level.

Other business located in a different city or county can therefore legally use your name. Incorporation will ensure you do not share a name with another business in your state. In addition, it will allow you to expand smoothly in other cities in your state.

 

4. Incorporation Offers Succession and Perpetual Existence

It is not possible for us to operate our business forever. At one point, we might want to transfer our business to another person. If you care about maintaining and protecting your legacy, then incorporation is the right route for you.

If you care about easily transferring your business from one owner to another, then again, incorporation is the right path for you.

For one reason or another, business owner might find his or herself leaving the business. You might find yourself either selling or transferring your business to a friend or family member.

The process of transferring your interest may actually be complicated if your business is currently in unincorporated partnership form.

The partner who wishes to transfer his or her interest would require the consent of all partners. This can be a great inconvenience. As if the inconvenience is not enough, if the other partners are not willing to offer their consent, the partnership will have to be dissolved.

Generally, a partnership is dissolved automatically if one of the partners in unincorporated partnership decides to leave the partnership without the consent of the other partners.

The situation is not any better in an unincorporated sole proprietorship. Sole proprietorship is automatically terminated if the owner dies or is no longer interested in running the business.

Incorporation fortunately eliminates this transferability restriction, thus, enabling your business to enjoy perpetual existence. However, the law understands that transferability restriction might be appropriate to some businesses and/or business owners.

It, therefore, does not make it a mandatory requirement for every incorporated business.

Business owners have the option of deciding whether to adopt the transferability benefits as whole or place restrictions on it. The best approach would be to adopt it but put various restrictions on it. However, you can always talk to us so that we can discuss specific detail that best suits your business.

 

5. Incorporation Allows You to Get Funds For Your Business

Getting funding is one of the most daunting tasks faced by entrepreneurs.

Financiers will scrutinize your business to make sure everything is in order. As pointed out earlier, incorporation increases the credibility of your business.

Financiers, therefore, are likely to give an incorporated business the first priority. When funding such a business, financiers will be at least sure that their money will be used for business and not for personal purposes.

You can easily convince them that the separate legal entity nature acquired through incorporation will serve to protect their funds from any forms of misuse.

In addition, an incorporated business is expected to have a separate bank account that investors can fund. Otherwise, it is very unlikely for investors to write check in your name.

Serious investors usually prefer incorporated business. Incorporated business offers them different ways of funding a business.

For instance, venture capitalist and angel investors can fund a business through purchasing the shares of the business. In fact, selling your business shares is one of the best ways of acquiring funding.

It allows you to receive funding while maintaining the control of your business. Nonetheless, you need to be careful not to lose the controlling stake of your business.

Selling shares of corporation or LLC is less complicated than selling shares of a partnership or a sole proprietorship.

Collateral or security is also another aspect business owners should consider while seeking funding, especially when they are seeking funding in the form of cash rather than through the sale of shares.

When relying on cash financing and you’re required to offer a collateral, the limited liability clause in corporation and LLC will protect you especially when you’re unable to meet your obligation.

Unlike in partnership or sole proprietorship, you will not be signing any contract in your name. You will sign in your business name implying that you do not rely on your asset or personal line of credit. Incorporation allows your business to acquire a credit line that is separate from your personal credit line.

 

6. Incorporation Helps You Maintain Your Business Confidentiality

It’s no surprise that business owners feel comfortable in keeping their business matters as confidential as possible. If you’re one of them, forming an incorporation may be the right decision for you. That’s because incorporation is the form of business that helps you run your business anonymously. One such example is the corporations being operated in Nevada. These corporations enjoy privacy and confidentiality as compared to those in other regions.

 

Conclusion

Every business should be incorporated if you’re serious about your business. The benefits of incorporation far outweigh any potential cons.

Limited liability aspect of incorporation will protect your personal asset. Adding an LLC or INC to your business will add credibility to your organization.

Incorporation will also protect your brand from being abused by your competitors.

The tax benefits enjoyed after forming an incorporation can significantly reduce your business expenses. And finally, incorporation will increase your chances of receiving financing from different sources.

Mollaei Law is a law firm specializing in business law serving businesses and entrepreneurs. We provide legal expertise in all stages of business development by drafting and reviewing contracts and agreements, assisting transactions and negotiating, forming LLC’s and Corporations, registering trademarks and copyrights, business planning, and answering any legal questions you may have about your business.

If you have any questions related to incorporations, advantages and disadvantages of corporation, please email me at sam@mollaeilaw.com

 

What Else Should You Know?

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. I’ll be looking forward to help you out.

Sam Mollaei, Esq.

As a Business Lawyer for Entrepreneurs, I help entrepreneurs start their U.S. business without dealing with complicated government forms. I’ve assisted more than 2,246 entrepreneurs successfully start their business and I'm backed by more than 702 5-Star Google Reviews. If you're interested in starting your business, take the first step by requesting your Free Strategy Session on this page.

Start Your U.S. Business Confidently

Join 2,640+ Entrepreneurs Who Have Successfully Started Their U.S. Business Without Dealing With Complicated Legal Forms

YES! I Want to Start My Business

Step 1 of 2: Start Your Application

Privacy Policy: Your information is 100% safe and secure

"The way to get started is to quit talking and start doing." - Walt Disney

50% Complete

Start Your U.S. Business Confidently

Join 2,640+ Entrepreneurs Who Have Successfully Started Their U.S. Business Without Dealing With Complicated Legal Forms

Privacy Policy: Your information is 100% safe and secure.