In forming a business, there are several things to consider, such as capital, target market and location. Apart from these, an aspiring entrepreneur has to make one important decision. What business form does he have in mind?
There are three choices: single proprietorship, partnership and corporation. In this particular discussion, we will explore the benefits and drawbacks of a corporation. While all forms of business have advantages and disadvantages, corporations tend to be more complicated and it will help to know the positive and negative views of supporters and critics.
List of Pros of Corporations
1. Security of Personal Assets
Advocates for corporations posit that this is the safest and most effective business form in terms of protecting your personal assets and properties. This is because if and when a corporation goes bankrupt, the personal savings and other finances of the owners will not be affected. If the business owes money, creditors will go after the business.
2. Business Continuity
Business people who prefer corporations say that even if the owner or owners and shareholders leave the corporation or if owners die and the business is going great, it can still continue to be in operation except for some documents that need to be filed. Other than that, corporations will still continue to exist.
Corporations have the potential to grow and expand because of the presence of investors who will join the company with their money and skills. Moreover, corporations are more likely to attract more potential investors. The more investors are there, the more credibility a corporation has.
4. Stock Options
Larger corporations give options to employees to own stocks and this can motivate more potential high performing employees to apply and join the these corporations.
List of Cons of Corporations
1. More Complicated
Unlike Sole Proprietorships and Partnerships where owners are limited, corporations require more people and the process is more complex, in terms of requirements, documentations and operations. Articles of Incorporation should be prepared, investors should be convinced and lawyers should be hired. Corporations are also more expensive to set-up and bigger capital is needed to run these companies.
2. Tax Liabilities
Another disadvantage of corporations is in terms of tax liabilities. Larger corporations have shareholders need to pay taxes for any earnings they receive and the profits from sales will be taxed. That said, taxes will be higher and investors will end up paying more taxes as opposed to sole proprietors and partners who are receiving salaries instead of dividends. This is on top of having to get professional help from experts like lawyers and accountants.
3. Government Regulations
Compared to Sole Proprietorships and Partnerships, corporations have to comply with more regulations of different government agencies. These requirements include environmental compliance, tax regulations, and insurance policies. Moreover, larger corporations have many employees. This means that there will be more risks for potential legal problems related to work as well as insurance claims.
4. Too Many Decision-makers
Corporations have many people involved, such as directors, presidents, investors and shareholders. When it comes to making decisions, the process might be long since there are many people to decide.
Corporations offer benefits but there is also a flipside to this. It may work on some businesses but may not be advisable to some. Potential business owners should research and look at the pros and cons of setting up a corporation before deciding on it.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to reach out to contact Natalie, then go here to send her a message.