Business Formation

What are Some of the Advantages or Disadvantages of Forming a Corporation?

Advantages

  • Generally, a corporation's shareholders are not liable for any debts incurred or judgments handed down against the corporation. Shareholders only risk their equity in the corporation.
  • Corporations may be able raise additional funds by selling shares in the corporation.
  • Corporations may deduct the cost of benefits it provides to employees and officers.
  • Some corporations may be able to elect treatment as an S corporation, which exempts them from federal income tax other than tax on certain capital gains and passive income.

Disadvantages

  • Forming a corporation requires more time and money than forming other business structures.
  • Governmental agencies monitor corporations, which may result in added paperwork.
  • Corporate profits may be subject to higher overall taxes since the government taxes profits at the corporate level and again at the individual level, if such profits are distributed to the shareholders. Furthermore, a corporation may not deduce from its business income any dividends it pays to its shareholders.