Advantages & Disadvantages of a Corporation

Advantages of a Corporation
  • • Shareholders have limited liability for the corporation's debts or judgments against the corporation.
  • • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
  • • Corporations can raise additional funds through the sale of stock.
  • • Corporations are the only legal entity that can offer an initial public offering (known as IPO)
  • • A Corporation may deduct the cost of benefits it provides to officers and employees.
  • • Can elect S Corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.
Disadvantages of a Corporation
  • • The process of incorporation requires more time and money than other forms of organization.
  • • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus this income can be taxed twice.
Subchapter S Corporation

A tax election only, this election enables the shareholder to treat the earnings and profits as distributions, and have them pass through directly to their personal tax return.  The catch here is that the shareholder, if working for the company, and if there is a profit, must pay his/herself wages, and it must meet standards of “reasonable compensation”.  This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit.  If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount.

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