Advantages & Disadvantages to Forming a Corporation

A corporation is one of the most enduring type of business entities, one that will exist regardless of who the owners or directors of the company may be. Forming a corporation has significant legal and tax ramifications on the shareholders of the company.

Liability

One of the biggest advantages of forming a corporation is that shareholders of the company do not jeopardize their personal assets by participating in the company's ownership. A shareholder's liability is limited to the amount the shareholder has invested in the corporation.

Double Tax

Corporations pay taxes twice on the same corporate earnings. A corporation must file taxes with the Internal Revenue Service, and shareholders of a corporation must report income received from the company on their personal tax return.

Cost

A corporation may be costly to form and operate. The cost to incorporate a business varies from state to state. Corporations may be required to pay annual fees and franchise taxes depending on the state of incorporation. A corporation may have to pay an accounting firm to prepare the company's financial statements.

Paperwork

Forming a corporation may require more paperwork than forming other types of business entities. Furthermore, corporations must keep records or notes from all company meetings, and maintain strict financial records.

References

• Citizen Media Law Project: Corporation
• Reference For Business: Incorporation
• All Business: Advantages and Disadvantages of Forming a Corporation

Resources

• Business: Corporation