A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts of the business.
Corporations are more complex than other business structures. They tend to have costly administrative fees and complex tax and legal requirements. As a result, corporations are generally suggested for established, larger companies with multiple employees.
Advantages of a Corporation
- Limited Liability. Shareholders are generally not responsible for business debts and the actions of a corporation. Their personal assets are protected.
- Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business – they can raise funds through the sale of stock.
- Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are taxed at a corporate tax rate, which is usually lower than an individual income tax rate.
- Attractive to Potential Employees. Corporations are generally able to attract and hire high-quality and motivated employees because they can offer benefits and the potential for partial ownership through stock options.
Disadvantages of a Corporation
- Time and Money. Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating and tax costs that most other structures do not.
- Double Taxation. Corporate profits are taxed twice. The corporation pays taxes on its profits and shareholders pay tax on dividends they receive.
- Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, they have increased paperwork and record-keeping burdens that other business structures do not have.
**This article is designed to provide helpful information that can be read within 2 minutes. It is neither a full explanation of this subject nor legal advice. To learn more, and to get legal advice on which you can rely, contact me or another lawyer.