Corporations are unique and fairly complex business structures that require an in-depth understanding of tax laws and business management. As intimidating as starting a corporation may seem, many business owners can benefit immensely from incorporating their businesses. This is a major decision, and there are many advantages and disadvantages to forming a corporation. Before you choose to incorporate your new business, use the information below to make an informed decision.
Pros of Incorporation
•Corporations are allowed to issue stock, which allows them to attract more investors than other business structures. If a person or organization is willing to invest capital in a corporation, it can simply purchase a large amount of stock and become a partial owner of the company. Despite the fact that shareholders are considered the true “owners” of the corporation, they will not be in charge of making important decisions. This process will be entrusted to a board of directors.
•Corporations have a clearly defined power structure: directors, officers, and shareholders. As mentioned above, directors are responsible for making major decisions that will have a far-reaching impact on the company. Officers oversee the day-to-day operation of the company and ensure the director’s decisions are carried out. Shareholders are technically owners, but they cannot make decisions regarding the company. If an issue does occur, there are ways for directors to be held liable for implementing detrimental policies or procedures.
•As a business owner, if you choose to incorporate your business, you will only have a limited amount of legal liability when it comes to the finances and operations of the corporation. This means that if the corporation engages in illegal activities or experiences serious issues with debt, you will not be held directly responsible since the corporation is legally considered a separate entity. However, this does not completely absolve you from responsibility, and you will have to follow a plethora of legal formalities in order to keep this special status.
Cons of Incorporation
•The process of incorporating a business is expensive and time-consuming. Numerous legal documents must be prepared by attorneys, and you must take the time to create the articles of incorporation and bylaws. You will also be responsible for paying a filing fee to your state’s Secretary of State office. The entire process can easily last several months to a year depending on the size of the organization.
•It is a well-known fact that many corporations are “double taxed.” This means that the corporation’s income will be taxed, in addition to any individual stockholder who profited from the corporation—these stockholder profits are known as dividends. Since this primarily occurs within larger corporations, smaller corporations may not experience the burden of double taxation. In smaller corporations, the stockholders usually work as employees of the company and receive a salary instead of dividends. Some corporations file an “S” corporation tax status in order to combat this issue.
•Corporations must follow a number of intricate formalities in order to ensure that the corporation remains a separate entity from its owners. The board of directors is required to hold regular meetings to discuss pertinent issues, and corporations are required to maintain highly detailed financial records. If a corporation does not engage in these formalities, it could face a multitude of legal difficulties.
Weigh Your Decision Carefully
There are many pros and cons to forming a corporation, and you will need to make a decision based on the needs and size of your own business. If you are willing to follow the stringent and complex laws, you may find that incorporation can be financially profitable for your small business. If this does not sound like a pleasant scenario, you may want to consider forming a limited liability company. Just be sure to weigh the pros and cons before making a final decision.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.