What Are the Advantages & Disadvantages of a Federal Law Corporation?
Choosing the right organizational structure for your business can protect valuable assets, limit tax liability, provide flexible financing alternatives and help your business reach its maximum potential. Choosing the wrong structure could hinder growth, increase taxes, limit financing and cause innumerable wasted hours in government reporting and record-keeping you might otherwise avoid. It's important when choosing the right structure to consider both the advantages and disadvantages of the most common form of business structure: the corporation.
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Personal Liability Protection
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One of the greatest advantages to the federal corporation business structure is the protection it provides for the principal officers' personal assets. By organizing your business as a corporation, none of the corporation's debts nor any legal claims (for infringement, liability or loss) can be attributed to the officers or stockholders of the corporation. As a result, personal liability is limited for all participants to the loss of their investment in the business only.
Ability to Issue Stock
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Another important advantage to the federal corporation business form is the ability to issue stock, thereby providing an opportunity to finance the business' startup, expansion or capital expenditures with equity in the business rather than cash. Federal corporations also enjoy a unique flexibility in issuing stock: it may issue stock of different classes, have as many shareholders as wish to own the stock, and its stock may be purchased by other corporations (such as institutional investors).
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Risk of Double Taxation
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The standard corporation, or C corporation, suffers the disadvantage of double taxation of income. Under the C corporation, corporate income is taxed the first time at the corporate level, and then is taxed as personal income a second time when the income is distributed to shareholders. Depending on the size of the business, this double taxation can as much as double the total taxes paid to the federal government. S corporations, though similar to C corporations, are not subject to double taxation.
Higher Tax Rate
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Another disadvantage to the corporation is its higher tax rate relative to other business structures. The federal corporate income tax rate is as high as 39 percent, as of July 2010, whereas the federal tax rate for personal income (such as from a sole proprietorship, partnership or S corporation) may be substantially less than that depending on the individual's total earnings. As a result, the business owners may pay more additional taxes than the same business would if organized differently.
Fulfilling Corporate Requirements
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Organizing your corporation as a business also requires that the legal requirements of corporations be met. These requirements include annual legal filings with the state and federal government (with fees), holding regular shareholder meetings, keeping minutes of meetings and maintaining corporate record books that must be available to the general public upon request. The corporation also requires its own tax filings with both state and federal government, which may double your total tax filing requirements.
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References
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