Advantages and Disadvantages Of Corporation: Right Move?

Are you considering taking your business to the next level and possibly forming a corporation? Or perhaps you've heard the term "corporation" thrown around in the business world, and you're eager to demystify this complex concept. Well, you've come to the right place!

In this blog, we're diving headfirst into the advantages and disadvantages of corporations, exploring their inner workings, the various types they come in, and the pivotal question: Is forming a corporation the right move for your business? 

From understanding the nuts and bolts of corporations to uncovering the unique characteristics of different corporate structures, we're here to simplify it all for you. So, let's embark on this corporate adventure and find out if it's the "Right Move" for your business!

What Is A Corporation?

A Corporation is a unique kind of business recognized by the government. It's not just a regular company; it's like a separate person in the eyes of the law. This special status is why many entrepreneurs find it appealing.

One of the key features of a corporation is that people, called shareholders, own it. These shareholders can be individuals or other businesses. What makes a corporation interesting is that ownership can change easily through the buying and selling of stock. This flexibility is great for businesses that plan to grow or even go public someday.

However, one of the best things about a corporation is that it offers a safety net. When your business becomes a corporation, it becomes a separate legal entity. If your corporation faces a lawsuit or legal trouble, it deals with it, not you personally. Your money and belongings are protected like a shield.

Becoming a corporation is not a snap decision. You have to follow your state's rules and regulations, like creating corporate bylaws and filing articles of incorporation with the secretary of state. It can take some time and effort, but once you finish this paperwork, your business becomes a corporation.

How Does A Corporation Operate?

Corporations are known to exist independently of their shareholders, and they are independent entities. The company is owned by shareholders and elected to rule it through a board, which has the responsibility of managerial operations and strategic orientation. The board then hires officers and management to handle the day-to-day activities, such as making strategic decisions, managing daily operations, and ensuring the business functions in the shareholders' best interests.

A well-run company is based on the following factors:

• Separate Legal Entity: A corporation is like its own legal person. It's different from the people who own it (shareholders). This separation is vital because it shields shareholders' stuff (like money and belongings) from the corporation's legal issues. It's like having a legal superhero that protects you.
• Broad Powers: Corporations have the power to do many things, like making contracts, owning stuff, borrowing money, hiring people, and even taking legal actions, like suing and being sued. They're like versatile Swiss Army knives of business structures.
• Decision-Making: Shareholders, the company's owners, play a role in choosing a group of leaders called the board of directors. Each shareholder usually gets one vote for each share they own when picking these directors. The board of directors is in charge of overseeing the everyday management of the corporation. They make important choices and can even hire a management team to run things day-to-day.
• Ownership Flexibility: In a corporation, how much of your business depends on how many shares you have. The great thing is that claims are easy to buy and sell. This means that ownership can change quickly. If a shareholder wants to sell, it's pretty simple. And if the corporation wants new investors, they can issue more shares. It's like a game of musical chairs with ownership – the music never stops.
• Business Continuity: Corporations are excellent at keeping a business going for the long haul. The easy transfer of ownership means that if someone wants to step down or new investors want to step in, it can happen without disrupting the business. It's like a relay race where the baton can be passed smoothly from one runner to the next, ensuring the race goes smoothly.

A corporation isn't just a bunch of rules and paperwork. It's an intelligent and adaptable way of doing business that offers protection, efficient decision-making, and the ability to keep running smoothly for a long time.

5 Common Types of Corporations

Five common types of corporations are C corporations, S corporations, Nonprofit corporations, B corporation, and closed corporation. Each has distinct characteristics regarding taxation, liability, and purpose.

C Corporation

C corporations are known for their flexibility in ownership. They can have an unlimited number of shareholders, and their right is divided into shares that can be easily bought and sold. This makes it an attractive option for businesses planning to attract a wide range of investors.

One of the distinctive features of C corporations is that they are taxed as a separate entity. This means the corporation itself pays taxes on its income, and shareholders are also taxed on the dividends they receive from the company. While this double taxation can be a drawback, it may be offset by the advantages of personal liability protection.

Shareholders of C corporations enjoy personal liability protection. Their assets are shielded from business debts and legal actions against the corporation. It's like having a legal safety net for your finances.

C corporations have an advantage in fundraising. They can raise capital by selling shares of stock, which is a common choice for larger companies looking to secure investments for growth and expansion.

S Corporation

Similar to C corporations, S corporations provide personal liability protection for shareholders. However, there's a limitation – all shareholders must be U.S. citizens. This limits the ability to attract foreign investors.

S corporations are considered pass-through entities, which means the income, losses, credits, and deductions "pass-through" to the shareholders. This income is then reported and taxed on the shareholders' tax returns, avoiding the issue of double taxation that C corporations face.

To qualify as an S corporation, specific requirements must be met, including having no more than 100 shareholders and only one class of stock. This structure is often preferred by smaller businesses looking for personal liability protection without the burden of double taxation.

B Corporation

B corporations, or B corps, are a relatively new and unique type of corporation. They are structured to benefit society and the environment. B corp status certifies that a business is legally committed to improving the world. It's not just about profits; it's about making a positive impact.

To become a B corporation, businesses must meet rigorous criteria, such as scoring 80 or above on the B Impact Assessment and publicly reporting their scores on BCorporation.net. This certification acknowledges a company's dedication to social and environmental causes.

A fascinating aspect of B corporations is that they can maintain their C corporation or S corporation tax status while holding this certification. This allows businesses to do good while staying profitable.

Closed corporation

Closed corporations are like tight-knit clubs. They are privately held and owned by a select group of shareholders. The shares of these corporations are not publicly traded, making them less accessible to outside investors.

Just like C corporations and S corporations, shareholders in closed corporations still enjoy the benefit of limited personal liability. Their assets are protected from business debts and legal issues.

Nonprofit corporation

Nonprofit corporations are formed for purposes that benefit society, including religious, charitable, political, educational, literary, scientific, social, or benevolent causes. These businesses exist to serve a mission rather than to generate profits for shareholders.

Nonprofits come with specific tax advantages, including applying for nonprofit tax-exempt status with state and federal governments. This exemption relieves them from paying federal and state taxes because they are pursuing a nonprofit mission. Most nonprofit corporations opt for 501(c)(3) tax-exempt status, which is typical for organizations focused on charitable and educational work.

10 The Advantages of a Corporation

The primary benefits of a corporation are limited liability, which provides the possibility to protect personal property against business debts. Other advantages include the fact that the business has a perpetual existence, meaning that the business will exist even after a change in ownership, a nd it is also more accessible to capital since one can sell the stock. The transfer of ownership can also be easily made, and a corporate structure could provide credibility.

1. The 'Sleep-at-Night' Shield (aka Limited Liability Protection)

This is the big one, the headline, the number one reason we're even having this conversation. As a Sole Proprietorship, you and your business are legally the same. If your business is sued, maybe a customer reacts to a product, or there's a dispute over a marketing claim, your personal assets are fair game. Your savings, your car, even your home.

By incorporating, you build a legal firewall. If the business faces a lawsuit or racks up debt, they go after the corporation's assets, not yours. This limited liability protection is the single greatest benefit, allowing you to take calculated business risks without betting your family's financial security.

2. You Instantly Look More Legit

Perception is reality in business. Having "Inc." or "Corp." after your brand's name signals permanence and credibility. Suppliers might offer you better payment terms, lenders will take your loan applications more seriously, and larger retail partners will see you as a stable, professional operation, not a fleeting side hustle.

3. The Superpower of Selling Stock to Fuel Growth

This is a power that only corporations have. Remember our pizza analogy? You can sell off slices (shares) of your company to raise money. This is how you go from funding your inventory with a credit card to getting a serious injection of cash for a massive ad spend, a new product line, or expanding internationally. For ambitious startups, this is the main path to raising capital/venture capital.

4. Your Brand Can Outlive You (Perpetual Existence)

A corporation has a potentially infinite lifespan. It isn't tied to you, the founder. This means you can build a brand that becomes a true legacy. It also makes your business a much more attractive asset to sell. An investor or buyer can purchase the shares, and the business continues to run seamlessly without you. This concept of perpetual existence is key to any long-term exit strategy.

5. More Ways to Play the Tax Game

While the tax code is complex, corporations open up new strategic doors. You can often deduct 100% of costs for employee health insurance and other benefits. You also gain access to different tax structures. By choosing to be an S Corporation (S Corp), for example, you can avoid the dreaded double taxation issue that sometimes affects a traditional C Corporation (C Corp). It gives you and your accountant more tools to work with.

6. Attracting Top Talent with a Piece of the Pie

As you scale, you'll need to hire A-players. But what about competing with other big corporations and their salaries and benefits? With ownership. Corporations are also able to provide stock options, whereby the key employees are provided with a real interest in the success of the company. This is an effective means of motivating your staff and being able to make them think like owners rather than employees.

7. Selling Your Business Becomes Cleaner and Simpler

When the day comes to exit, selling a corporation can be much more straightforward. Instead of a messy process of selling off equipment, inventory, and intellectual property piece by piece, you're often just transferring the shares of stock to the new owner. It's a cleaner transaction for everyone involved.

8. Your Business Gets Its Own Credit Score

Just like you have a personal credit score, a corporation can build its own business credit history. A strong business credit profile can help you secure loans, get credit cards with high limits, and negotiate better terms with suppliers, all without having to personally guarantee the debt or put your own credit on the line.

9. A Layer of Privacy for the Owners

In certain states (with Delaware being the most famous example), you can form a corporation without listing the owners' names on public documents. This provides a layer of anonymity that many entrepreneurs appreciate.

10. A Forced Blueprint for Growth

This might sound like a disadvantage, but it's a hidden benefit. The disciplines of corporate governance, such as the need to organize annual meetings (even when it is a one-on-one affair) and record-keeping, compel you to be more organized. It causes you to get out of the day-to-day routine and think about your business strategically, recording the key decisions and a sense of direction. Such an arrangement is what distinguishes between a start-up nightmare and a scaled business.

10 The Disadvantages of a Corporation

The main disadvantages of a corporation include double taxation on profits and dividends, high costs for formation and ongoing compliance, and complex administrative and regulatory requirements that demand extensive paperwork and adherence to corporate formalities. Other drawbacks are limited owner control due to a board of directors, less flexibility, and a lack of business privacy.

1. The Dreaded "Double Taxation"

This is the monster under the bed for many business owners. With a standard C Corporation, your business gets taxed once on its profits. Taxation is then reimposed again on you when you issue those profits to yourself and other owners in the form of shareholders ' dividends on your personal tax return. This is the so-called double taxation at its worst, and it can bite a big chunk of your earnings. Though a byana S corp election can resolve this, not all businesses are eligible.

2. The Paperwork is a Beast

Welcome to the world of formal record-keeping. Corporations are required by law to maintain detailed records. This includes writing up your corporate bylaws (your company's internal rulebook), issuing stock certificates, keeping minutes from your meetings, and filing annual reports with the state. This is what's meant by how to maintain corporate compliance for a small business, and ignoring it is not an option.

3. It Costs More, Period.

There’s no way around it. The price of forming a corporation is a much higher one than a simple Sole Proprietorship. You will also incur state filing costs, and you might need a business incorporation attorney to be sure your articles of incorporation are filed properly. The cost of doing so is not to mention the cost of ongoing costs (annual report fees) and even the possible cost of a registered agent service.

4. Decisions Can Be Slower and More Rigid

Do you recall that official shareholder, director, and officers structure? It is excellent in terms of governance; however, it is slow and bulky as a fast-moving eCommerce brand. Need to make a major pivot? Formally, you have to conduct a board meeting and record the decision. This formality may seem like a straitjacket in comparison with the freedom of action of a sole proprietorship that does it now.

5. You Can't Just Move Money Around

This is a huge mental shift for new founders. You can't just pay for your groceries with the business debit card or transfer funds to your personal account on a whim. Doing so is called "co-mingling funds," and it's the fastest way to get an attorney to "pierce the corporate veil," which would shatter your personal liability protection. All money must move through formal channels, like a salary or declared dividends.

6. The Tax Disadvantages of a C Corporation Can Be Steep

Other possible tax headaches exist in addition to the double taxation. To illustrate, in case the corporation makes a net loss during the year, you, as the owner, are not allowed to deduct such a business loss on your personal income tax form. The loss remains stagnant in the corporation. That loss would be allowed to offset your other personal income with a pass-through entity such as an LLC or S corporation.

7. Less Flexibility in Allocating Profits

The allocation of profits is proportional to the percentage of ownership in a C Corporation. So that with 70 per cent of the stock, you receive 70 per cent of the dividends. You can't change that. A business organization, such as a partnership or an LLC, is more flexible, in contrast, as you can agree to partition profits in proportion to a different ratio than ownership percentages.

8. State and Federal Scrutiny

Businesses are under greater scrutiny. They are required to undergo a higher regulatory control by the state in which they are incorporated, as well as federal bodies such as the Internal Revenue Service (IRS). This requires that your bookkeeping be clean and your compliance airtight

9. Complexity for Solo Founders

If you're a one-person show, the corporate structure can feel like overkill. As a shareholder, board director, and CEO of yourself, there is a lot of administrative juggling. To a great number of consultants, freelancers, or single-owner stores, this rise in benefits of incorporation as a consultant or freelancer may be offset by the overwhelming hassle of the process, and an LLC is more practical.

10. Dissolving the Business is a Formal Process

If you decide to close up shop, you can't just walk away. You have to formally dissolve the corporation according to state law formally. This involves filing dissolution paperwork, liquidating assets in a specific way, and notifying creditors. It's a much more involved process than simply closing down a sole proprietorship.

How To Form A Corporation?

In order to establish a corporation, you will be required to choose a company name and choose a registered agent to handle legal paperwork for your business, and submit your articles of incorporation to the office of the appropriate state. Once you have filed, you would have to have first board meetings, develop corporate bylaws, offer stock, and get a federal EIN by registering with the IRS. Finally, comply with all state and local business licensing and permitting requirements.

Step 1: Choose your business name

Select a name for your corporation that complies with your state's rules. It must include specific designation words like "Limited," "Incorporated," and "Corporation" or their abbreviated versions. Check for restricted terms and ensure your chosen name doesn't infringe on existing trademarks.

Step 2: Make sure your name is available

Contact your state's business formation agency to confirm your business name is available. This step is crucial to avoid trademark violations. Sometimes, you can reserve the name briefly before officially registering it.

Step 3: Register a “doing business as” name

If you plan to operate under a different name than your corporate name, you should register a DBA name, a fictitious name, an assumed name, or a trade name. Be aware that DBA rules vary across levels, including state, county, and city.

Step 4: Appoint your directors and registered agent

Appoint directors for your corporation, ensuring compliance with your state's specific requirements regarding the number of directors. Additionally, designate a registered agent responsible for receiving official government notices and compliance-related documents. While an owner can serve as the registered agent, they are not obligated to do so.

Step 5: File articles of incorporation

Prepare and file the articles of incorporation with your state's Secretary of State's office. These articles include essential information about your business, such as its name, purpose, and details about the issuance of stock. The specific name for this document may vary by state but can be called the certificate of incorporation or certificate of formation.

Step 6: Write your corporate bylaws

Create corporate bylaws, which are the governing rules for how your corporation operates. They cover various aspects, including stock issuance, meeting procedures, record-keeping, and other business-related processes. It's advisable to consult an attorney when drafting your corporate bylaws to ensure they meet all legal requirements.

Step 7: Write your shareholder’s agreement

While not mandatory, a shareholder's agreement is recommended. It protects the interests of shareholders, particularly in cases where an owner passes away or leaves the corporation, resulting in a transfer of ownership. Seek professional assistance when drafting this agreement.

Step 8: Hold your first board of directors meeting

In your initial board of directors meeting, discuss the overall operation of the corporation. This includes matters such as bylaws, the appointment of corporate officers, and authorization for the issuance of stock.

Step 9: Issue your stock

If your corporation is more significant, you may need to register stock offerings with the Securities and Exchange Commission (SEC) and your state's securities agency. Ensure compliance with their requirements.

Step 10: Obtain business licenses and permits

Check with local and state governments to determine the necessary business permits and licenses required before commencing official operations. The specific requirements can vary based on your business type.

Step 11: Register with state and local agencies and the IRS

It's essential to register your corporation with both the Internal Revenue Service (IRS) and state and local revenue agencies. Refer to the IRS website for more detailed information and guidance.

Step 12: Open a corporate bank account

To maintain tax compliance and financial separation, open a corporate bank account distinct from owners' accounts. Explore different banking options to find the best performance for your corporation's needs.

Quick Summary of the Corporation's Pros and Cons

Success for your online store hinges on a fantastic customer experience. It begins with a clean and easy-to-use site with an excellent first impression, and helps the visitor navigate in a hassle-free way to the discovery of the checkout point. Grow your dream audience through a smart content and SEO strategy that generates trust. Lastly, establish cult followers by providing quality products that are supported by superior customer service. Mastering these pillars, site design, traffic, and fulfillment, is the key to standing out and achieving sustainable growth.

The table below provides a concise overview of the benefits and drawbacks of incorporating your business as a corporation. It can help you make an informed decision based on your business needs and circumstances.

FAQs

1. What is the difference between a C corporation and an S corporation?

The primary difference between a C corporation and an S corporation lies in how they are taxed:

C Corporation:

• C corporations are the default structure for all corporations.
• They are subject to double taxation, where the business income is taxed at the corporate level, and shareholders are also taxed on any dividends they receive.
• There is no restriction on the number of shareholders, and they can have multiple classes of stock.
• Shareholders can be of any nationality or residency.

S Corporation:

• S corporations are a specific tax designation that C corporations can choose by filling out additional paperwork.
• They avoid double taxation. Instead, business income is taxed at the personal tax rates of the owners (shareholders) rather than at the corporate level.
• S corporations must adhere to certain restrictions, such as having only one class of stock and a maximum of 100 shareholders, all of whom must be U.S. citizens.

C corporations face double taxation, while S corporations offer pass-through taxation at the individual level. Still, they restrict the number of shareholders and the types of stock they can issue.

2. Can one person form a corporation?

Yes, one person can form a corporation. All states allow for the creation of a single-owner corporation. However, even if a corporation has only one owner, it must follow all the standard formalities and legal requirements to ensure compliance with state and federal laws.

3. Does a corporation have to be formed in the state of operation?

No, a corporation does not have to be formed in the state where it operates. You can form a corporation in any state, even outside, where you plan to conduct business. Suppose you choose to incorporate in a state known for its favorable tax and business laws, such as Nevada or Delaware, but intend to operate in your home state. In that case, you must also file the necessary documents in your home state. This process, known as "foreign qualification," allows your corporation to do business in multiple states while still being legally compliant.

4. How do you decide if a corporation is the proper structure for your business?

To decide if a corporation is the proper structure for your business, follow these steps:

• Consult with professionals: Seek advice from business lawyers, tax advisors, and accountants to understand how different structures impact your business.
• Consider your business goals: Consider your long-term objectives, such as personal liability protection, access to capital, and taxation.
• Review legal requirements: Understand the formalities and responsibilities of your chosen structure.
• Assess future growth: If you anticipate significant expansion, a corporation may be a good choice.
• Evaluate personal preferences: Consider your comfort and preferences in selecting the right structure.

5. How can corporations reduce their taxes?

Corporations can reduce taxes through several methods, including

• Net Operating Losses: Offset current or future income with losses from previous years, reducing taxable income.
• Tax Credits: Utilize tax credits to lower the overall tax liability, such as research and development credits or renewable energy credits.
• Accelerated Depreciation: Deduct the cost of assets faster through accelerated depreciation methods, reducing taxable income.
• Profit Sharing: Implement profit-sharing plans or retirement accounts for employees to lower taxable income.

Corporations must engage a professional accountant when filing taxes to ensure compliance and maximize tax benefits.

Bonus: 7 factors that help online businesses succeed

In the digital age, online businesses thrive by incorporating strategies and practices that set them apart. These seven essential factors can help your online business not only survive but also succeed in a highly competitive landscape:

1. Optimize Website Design

The design of your website serves as the initial impression for potential customers. Delve into the psychology of user experience (UX) by considering factors like color schemes, layout, and visual hierarchy to create a design that not only attracts but also guides visitors through the conversion funnel.

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EComposer has been gaining traction, particularly within the business community, owing to its competitive pricing and exceptional website development capabilities. This innovative Shopify app empowers users to design professional online stores without requiring coding expertise. It boasts an extensive selection of templates, elements, and extensions, making it effortless to create a wide range of web pages, including Landing Pages, Product Pages, Home Pages, Collections, Blogs, as well as essential pages like FAQs, Contact Us, and About Us. With EComposer, website creation has never been more accessible and user-friendly.

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2. SEO (Search Engine Optimization)

Beyond the basics of keyword research and optimization, advanced SEO involves in-depth competitor analysis, long-tail keyword targeting, and the continual refinement of content and meta tags. A holistic SEO strategy should encompass on-page and off-page optimization, including backlink building and mobile optimization.

3. Create a Good Content Strategy

Content is more than just articles and blog posts. Deepen your content strategy by exploring multimedia content such as podcasts, webinars, and interactive tools. Align your content with the specific needs and pain points of your target audience to establish authority and build trust.

4. Ease of Navigation

A profound understanding of information architecture and user journeys is essential. Conduct usability testing and gather user feedback to fine-tune your website's navigation and ensure a seamless, frustration-free experience.

5. Customer Service

Going beyond responsive customer service, employ sentiment analysis and customer feedback to detect trends and anticipate needs. Implement personalized service and proactively address issues to build a loyal customer base.

6. User-friendly Interface

Conduct user testing and usability studies to uncover pain points and areas of improvement in your interface. Implement a human-centered design approach, focusing on user needs and preferences.

7. Product High Quality

Quality assurance processes, feedback loops, and continuous improvement initiatives are crucial. Dive into the product development cycle with techniques like Six Sigma, Lean, or Agile to consistently deliver products or services that exceed customer expectations.

Final Thoughts

In conclusion, the decision to structure your business as a corporation is a pivotal one, with both advantages and disadvantages that can significantly impact your journey as an entrepreneur. The advantages of limited personal liability, business continuity, access to capital, and potential tax benefits offer compelling reasons to consider this path.

Ultimately, the "right move" for your business structure depends on your unique goals, circumstances, and preferences. Seeking guidance from legal and financial professionals is highly recommended to make an informed decision that aligns with your objectives.

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