Corporate Advantages and Disanvantages

Corporate Advantages

There are many advantages to doing business as a corporation. If a corporation is properly organized and maintained, shareholders have no liability for corporate debts and lawsuits, and officers and directors usually have no personal liability for their corporate acts. The existence of a corporation may be perpetual, unlike a sole proprietorship or partnership. There are also tax advantages allowed only to corporations.

For example, in a corporation, not all amounts paid out to employees are subject to self-employment tax—only salaries are subject to this tax. Other amounts distributed, as dividends, for example, are not subject to self-employment tax (assuming the tax authorities do not exercise their right to re-characterize income). In a sole proprietorship, partnership or LLC, generally all amounts paid out to employees, whether salary or not, will be subject to self-employment tax.

There may be prestige in owning a corporation; capital may be raised by issuing stock; and it is easy to transfer ownership upon death. A small corporation can be set up as an S corporation to avoid corporate taxes but still retain corporate advantages. Some types of businesses can be created as non-profit corporations that provide significant tax savings.

Corporate Disadvantages

There are also disadvantages to the corporate structure. There are start-up costs for forming a corporation, and there are certain formal actions that are required such as annual meetings, maintaining separate bank accounts and filing tax forms. Unless a corporation registers as an S corporation it must pay federal income tax separate from the

tax paid by the owners, and may pay more than the minimum state income tax.

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