A corporation is a business entity that comes with benefits and downsides. Corporations are the most popular form of doing business because they protect their owners from personal liability for decisions made by the company. In other words, if you own a corporation, your possible losses will be limited to the amount you’ve invested in it. The disadvantages of a corporation can include costly start-up and ongoing formation expenses, double taxation on profits, and many other compliance costs. So, what are the advantages and disadvantages of a corporation?
Below you’ll find all the advantages and disadvantages of a corporation. Not all of them will apply to every single business out there, so take your situation into account when considering what type of business entity is right for you.
What is a corporation?
A corporation is a distinct legal entity that offers its owners limited liability in exchange for complying with specific state and federal regulations. In other words, when you form a corporation, your business will have many of the same rights as a person when it comes to things like buying and selling property or defending itself in court.
What are the types of corporations?
There are two types of corporations: S and C. An S Corporation does not pay taxes at the company level. Instead, all profits and losses are passed through to shareholders who then report them on their personal income tax returns. C corps, on the other hand, do pay taxes at the corporate level.
S-Corp Advantages and Disadvantages
Advantages:
- Limited liability of stockholders
- Profits in an S-corp are not taxed at the corporate level.
- Transferring ownership of an S-corp is typically more straightforward.
A Subchapter S corporation, abbreviated “S corp,” is a special designation for small businesses by the Internal Revenue Service (IRS) in the United States. It lets business owners avoid double taxation, similar to a limited liability company (LLC), but they’re still able to write off certain business losses on their personal tax returns.
Disadvantages:
- The number of shareholders of an S-corp is limited to 100.
- Transferring ownership of an S-corp usually comes with restrictions.
- Shareholders must be U.S. citizens or residents.
S-corps are usually best for small business owners who are sole proprietors.
C-Corp Advantages and Disadvantages
Advantages:
- C-corp stock dividends may be tax free (depending on the type of income earned and total amount of dividend received by shareholders)
- It’s easier to attract investors with a C-corp
- There are no restrictions on who, including foreign investors, can own stock in a C-corporation
A Subchapter C corporation, abbreviated “C corp“, is a corporation that has not made an election to be taxed as a flow-through entity. C corps are taxed at the corporate level, and their shareholders are also taxed on any dividends distributed or “flows through” from the company.
Disadvantages:
- Owners of a c-corp must pay a double tax on company money: C-corps pay corporation taxes and the shareholders must also pay income taxes.
- It can be more expensive to start a C-corporation, with lawyers and accountants’ fees running into the thousands.
- Owners cannot deduct business losses from their personal incomes.
C-corps are usually large, public companies. It can be hard for small businesses to acquire the capital they need once they become a C-corp to expand or innovate.
What is the management structure in a corporation?
The management structure of a corporation is usually hierarchical. This means that there are positions of leadership with individuals who have been given delegated authority from the board of directors or shareholders to carry out certain functions. In most cases, this person is the Chief Executive Officer (CEO) and/or President though there can be other positions as well such as Vice-President or Chief Operations Officer.
The individuals in these positions make up the executive team and they report directly to the board.
What is the difference between a public and private company?
Differences in ownership
When a company is private, it’s owned and controlled by one person or a small group of people. The shares are held privately from the remainder of the shareholders/public and their stock prices are not published. In most cases, only those with access to the “inner circle” know what they are selling at.
A public company, on the other hand, has its securities listed on an exchange. They are subject to laws regarding their governance and are more tightly regulated with regard to disclosure of information.
Differences in raising funds
The primary difference between a public and private company is how they raise money. For example, when your business needs to acquire cash in order to grow, you must issue securities or take on debt.
Small businesses usually use the “private” method by having one person or a small group of people with a controlling interest purchase all available stock. The business is then considered partially or completely owned by those people. If the business needs money, another person or group can purchase “additional” stock; however, each existing shareholder will now own less of the company. Whoever sold the stock now has more available cash to expand the company.
A public company has shares that are available for purchase by the general public (a group of individuals not involved with running the company) or to past employees via stock options. The price at which these stocks are traded is based on supply and demand; therefore, you must make periodic disclosures about your business to make sure investors have enough information to operate.
Conclusion
As expected, there are advantages and disadvantages of a corporation and to every business entity type. It is up to the business owner(s) to determine which structure will work best for them. You should also consult with an attorney or accountant who can help you make the right decision based on your specific circumstances.
