When utilizing the corporate business structure, you create a legal entity separate from its owners/founders that has been formed to conduct some specified type of business. The entity faces its own tax obligations, as well as liability for its actions, must meet various formality, regulation, and tax requirements, and, as a result, is more complex and expensive to create and maintain than other business structures.
What are the Main Advantages of the Corporate Business Structure?
Without a doubt, the biggest incentive to form a corporation, particularly in the case of a small business owner, is the protection afforded to that individual owner from liability. Not only is the owner not liable for the corporation’s debt, but the owner is also able to avoid paying income tax on some of the annual profits kept by the corporation. An additional monetary incentive of the corporate form of business is its ability to raise capital by way of selling common or preferred stock.
What are the Main Disadvantages of the Corporate Business Structure?
As mentioned above, the corporate business form is complex and, as a result, often requires the assistance of an experienced attorney to navigate through the formation process. And, even once the corporation has been formed, there are a wide variety of rules and regulations to follow, as well as reports to file and accounting matters to be aware of. As can be expected, this increased complexity results in increased costs. Additionally, as the corporation is a separate legal – and therefore taxable – entity, it must, except in certain narrow situations, pay corporate income tax. Its owners then, are required to report on their individual tax returns any earnings distributed to them from the corporation, which may result in, effectively, “double taxation.”
What is an S Corporation?
Often used by small-business owners, the S corporation provides the same personal liability protection as a traditional corporation, but also offers tax benefits that are unavailable with the traditional corporate structure. Specifically, taxable corporate profits and losses “pass-through” to the shareholders of the corporation, who then report those amounts on their personal income tax returns. As to be expected, there are some disadvantages to, and requirements that hinder access to, the S corporation. First and foremost, and different from that of a traditional corporation, there is a cap on the number of shareholders that an S corporation may have. The S corporation is also subject to the formality, regulation, and filing requirements of a traditional corporation, which means that while it does offer great tax benefits, it is also a complex and expensive entity to create and maintain.
If you think that the corporate business structure may be the right fit for your new business enterprise, please give us a call so that our experienced attorneys can help walk you through the myriad complexities of corporate formation and maintenance.