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Biggest Disadvantages of Corporation (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 boss. Your answer to only yourself. The problem? Well, you also have to make decisions that could ultimately make or break your business. For example, should your business be a corporation or maybe some other form of business?

This article is for business owners trying to determine their business structure and whether a corporation makes sense. There are various options available when choosing the legal structure of a company. One option is to form a corporation. Everything brings its pros and cons.

Small business owners have a variety of options when establishing the legal structure. One option is to structure as a corporation. Although there are several reasons why incorporating can be advantageous to your business, there are a few disadvantages to be aware of as well.

Sounds confusing, right? Fortunately, I can help you figure out the advantages and the downside of the Corporation.

What is a Corporation?

A corporation is a legal business entity that the government recognizes as separate from its owners. Most new and prospective business owners are familiar with corporations because it provides limited protection of their liability.

This means it limits the connection between personal liability and business or corporate debts. This appeals to people because it translates into one simple, right, suitable straightforward statement – less paperwork. However, it’s essential to keep in mind there is so much more to establishing and maintaining a corporation than the initial decision. For example, you must 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 a corporation.

The main advantage of a Corporation

The most significant advantage of a corporation is the protection a corporation provides to its personal asset liability protection. Making this decision will draw a clear line separating 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.

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 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.

The third benefit to corporations is perpetual existence. The business ends with a partnership or sole proprietorship if the owner passes or leaves the corporation and transfer ownership. Additionally, some LLCs dissolve if a shareholder dies. On the other hand, the company that is incorporated, on the other hand, can continue to exist.

While an LLC isn’t any different tax-wise than a sole proprietorship, being a corporation will offer you some flexibility. For example, you can avoid double taxation if you claim S tax status. HOWEVER, both LLC and corporations provide the opportunity to deduct many typical business expenses such as salaries as well.

What’s the main disadvantage of Corporation?

The main disadvantage of a 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 suitable new both the good and the bad.

This is the only way to make the best decision regarding whether or not a corporation is right suitable 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, a few shareholders also have to pay taxes on their returns while you, as the corporation, only have to pay federal and state taxes once. 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 double taxation.

Corporation Advantages and Disadvantages

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

It’s natural to have difficulty deciding between forming a corporation or forming another type of business. It’s a big decision. If everything works out, this business will have you set for life. So, you want to make the right decision.

Let’s take a look at a shortlist of the advantages and disadvantages before you look into forming a corporation.

Advantages of a Corporation

  • Shareholders are typically not liable for debt or judgment passed against the corporation.
  • Forming a corporation 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

Is S Corporation subject to double taxation?

The S corporation is not subject to multiple taxations, and income is taxed at the personal tax rates of the owners rather than at the corporate level. Transferring ownership of an S-corporation is typically more straightforward. A Subchapter S corporation, abbreviated “S corp,” is a special designation for small businesses by the Internal Revenue Service (IRS) in the United States.

The disadvantage 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 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 than a corporation.

While there are formation fees, filing fees, and annual state fees, you will have a lower insurance cost to balance it out. However, with the right business lawyer helping you out, there aren’t as many formalities to worry about when it comes to sole proprietorships and partnerships; incorporating your business can be a fast and affordable task if you decide it is the right option for you.

There aren’t as many formalities to worry about relating to sole proprietorships and partnerships. You have to file legal documents with the state to create a corporation. There are also all sorts of civilities 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 isn’t tricky. It is just a bit time-consuming.

LLC vs Corporation

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

All corporations begin as a C corporation but have the option to change to an S corporation. S corporations are not subject to multiple taxations, and income is taxed at the personal tax rates of the owners rather than at the corporate level and keep in mind that each of them is considered a private company and has its corporate bylaws and corporation structure.

The C corporation is the most common form of incorporation and is taxed on its income as separate entities. C-corporations’ business income usually gets taxed first at the entity level and then at the shareholder level. Hence, if you want to avoid double taxation, form an S-corp, and be vigilant to meet all legal requirements.

However, in the case of a private company, it is comparatively difficult to transfer shares as there are some restrictions. Building a corporate form of business organization is considered more stable than other forms of business organization. Even though the initial cost to form a corporation is substantial and there is a lot of paperwork, the corporate form is beneficial to the shareholders in the long term.

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 a corporation you may face. Furthermore, S corporations cannot be owned by C corporations, other S corporations, LLCs, trusts, or partnerships.

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.

Piercing the Corporate Veil

Piercing the corporate veil is a term used 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 where a court will hold you personally responsible and pierce the corporate veil.

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

  • You’ve created no absolute separation between you and your company. If you mix your business’s finances and your ones, you’ve removed that see your business’s financesaration. Your business’s finances. They overcame. This is simple as paying business bills from a personal checking account.

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.

Piercing the corporate veil is something that can happen to you, and it can be devastating.
Work with a business lawyer or contact me at sam@mollaeilaw.com to set up your business correctly from the beginning, and then let one help you stay compliant throughout the year.

LLC Benefits

Incorporating your business is one of the most intelligent 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

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 andThis means a strategic business process. When you incorporate your business, you make it a separate legal entity. This means 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 the business structure largely depends on your business’s vision, goals, and strategy. There are many different entity types and proper factors to consider when determining the right design. Choosing the correct structure is essential because the type of business you create determines the applications and forms you will need to file. There are also significant personal liability and tax implications for each business type.

A business lawyer can help you choose the correct entity by raising all the necessary considerations and 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. As the name states, LLCs provide their owners and investors with LLC debts. This means that your assets remain untouchable to cover business dues, 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. It simply means that the corporation and the investor’s business profits experience taxation. In an LLC, the initial gains are not considered income, and therefore, you are not required to pay self-employment taxes on them. On the other hand, a corporation is also an independent legal entity, separate from the people who own, control, and manage.

Here are the top 2 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 underperform, 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 successful long-term entrepreneur; they will tell you that they had to overcome immense challenges before succeeding.

Both Corporations and LLCs offer you an opportunity to protect your assets. You can properly structure your business to enjoy limited liability status with the right legal advice. This means that your rights and obligations would be different from your business. Business debtors, therefore, cannot claim your personal property in case the company is unable to pay them.

2. Incorporation Offers Tax Benefits

Minimizing your expenses will enhance the odds of your business being successful and magnify your profits if the company is already profitable. Reducing your tax liability or general 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 significantly reduce your tax costs. Tax expense deduction is one of the most significant benefits of incorporation. Incorporation allows businesses to deduct fringe benefits, namely travel, medical, or other daily business expenses.

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

 

What Else Should You Know?

Launching a small business can be an exciting venture. However, a large portion of the time, establishing it as a sole proprietorship can be a big mistake. 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 significant – it can cause big problems if your business company has any issues.

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

Conclusion

Every business should be incorporated if you’re serious about your business. The benefits of incorporation far outweigh any potential cons. Limited liability aspects of incorporation will protect your assets. 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 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 LLCs and Corporations, registering trademarks and copyrights, business planning, and answering any legal questions you may have about your business.

When you’re ready to take the next step and incorporate your business, I’ll be looking forward to helping you out. If you have any questions related to incorporations, advantages, and disadvantages of a corporation, please email me at sam@mollaeilaw.com

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