Sometimes, it is a double-edged sword. The attractive things about a corporation may also present a downside, depending on what your business is or how you would like to run it. See the reasons in this article to determine if the downsides are worth the rewards of forming a corporation.
Distinct Legal Entity
If your business is your idea and passion in life, it is important to understand that you will not be the personal owner. A corporation is a distinct legal entity that is governed by a board of directors. It is possible that even if you started the corporation, a board could take control of the business, leaving you without a say. A board often has the ability to fire the founder and vote other board members out. If you need to maintain total control of your business, you should consider another form of business structure.
Double Taxation
Another disadvantage of forming a corporation is the double taxation requirement. C corporations pay taxes on profits when corporate income is distributed to owners (shareholders) in the form of dividends. This is the first taxation. The shareholders who receive dividends must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money. The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is another option. Choose the Internal Revenue Service (IRS) S Corporation tax status to avoid double taxation.
Expensive to Form
There are many filing fees associated with forming a corporation. Formation fees can vary state-to-state, ranging from as little as $45 to as high as $315. Nonprofits must file even more paperwork because they must apply to the IRS for tax exemption status (minimum $750 to apply). In a few states, nonprofits may also have to file separately for state tax exemption status. Even small fees can add up if you are cash-strapped already.
Complicated to Form
Corporations must file Articles of Incorporation with the state they are incorporating in, for which states charge different filing fees. They may also need to file bylaws, which may require the help of an attorney to write.
Extensive Rules to Follow
There are many standards required by law on how a corporation governs itself. Corporations must have a board of directors, hold meetings at determined intervals, and keep certain records. If a corporation sells stock or has a membership, there are many other rules that apply. Starting a business is a big commitment of time, resources, and money. Before deciding on the type of business to form, it is important to weigh all of the pros and cons of each business structure.
