The disadvantages of forming a corporation

The disadvantages of forming a corporation

On Behalf of | Jan 4, 2021 | Business & Corporate Law |

One of the first decisions an entrepreneur must make is whether or not to incorporate. While incorporation can make sense for some businesses, especially large and well-established businesses, it is not the right solution for every company. As with any business legal structure, there are advantages and disadvantages to incorporation. Therefore, the decision to incorporate or not should be based on the needs of your specific business and careful analysis of the disadvantages and advantages of incorporation.

Possible tax liability

Due to the structure of a traditional corporation, company profits can be taxed twice. In other words, the corporation is taxed, and then any dividends paid to individual stockholders are also taxed. Depending on the size of the company, this may or may not be an issue for owners or stockholders. For instance, the owner of a small company is likely to also work for the company and take a salary, which is tax-deductible for the corporation.

Formal requirements

The law requires a corporation to observe several formalities to ensure that it is operating as an independent entity. These requirements include keeping records of all corporate activity, maintaining the corporation’s financial independence and holding regular directors’ meetings.

Expensive and time-consuming

Incorporation can be an expensive and time-consuming process. Multiple documents are required, including bylaws and articles of incorporation. Additionally, you will need to pay filing fees to your local Secretary of State office or similar business filing agency for your state.

Other options

In addition to incorporation, there are other options for a new business venture, including partnerships, sole proprietorships and limited liability companies, or LLCs. If incorporation is not the right option for your business, one of these other forms of business legal structure may fit your requirements.

An attorney may help you choose the right business legal structure

For a business owner, the decision whether to incorporate or which business legal structure to use may be a daunting one. Many future aspects of the business will depend on this decision. An attorney with a background in business and corporate formation may evaluate your business and discuss which business legal structure makes the most sense for your current business situation.