LLC vs Corporation: Advantages and Disadvantages

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disadvantages of corporation

While all business entities need to respect internal controls and maintain accurate records, most of a corporation’s requirements are unnecessary for small businesses. Other business entity options provide a trimmed down version of required procedures and recordkeeping that makes more sense. Before discussing the disadvantages of corporations, it may be helpful to know that a corporation is a business that is a legal entity of its own. Other business structures, such as a limited liability company (LLC), also provide this protection.

What is an example of corporation disadvantages?

  • Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
  • Excessive tax filings.
  • Independent management.

Note that the IRS does provide some leeway for businesses that have a reasonable cause for not filing Form 2553 on time. The business owner must explain on Form 2553 why they filed the form late. Upon IRS approval, the S Corp status will be made retroactive to the start of the tax year. It can elect to be taxed as an S corporation, which allows profit and loss to flow directly to its shareholders in the manner of the LLC. BrewerLong’s attorneys have decades of experience guiding small businesses towards a path of success. We understand the disadvantages of corporations and how business growth needs are based on your line of commerce.

Advantages and Disadvantages of a Corporation

There are a lot of choices when choosing a business structure or entity. Advantages to corporations are that they have limited liability and enhanced abilities in raising capital. Visa, Mastercard, and American Express are all examples of publicly traded C corporations that distribute dividends to shareholders. The different types of corporations are listed here with brief examples of how they differ from accomplishing different objectives necessary for different types of businesses. The main difference between an LLC and a corporation is that an LLC is owned by its members, while a corporation is owned by its shareholders.

This is because the income tax laws allow these costs to be written off over a minimum of five years. Because they are considered to have future benefits, they are capitalized and are referred to as organization costs. The procedures to form a corporation and subsequently to conduct business are a function of state law, and as you might expect, all states have somewhat different laws.

S corporation disadvantages: complicated obligations and stock-related restrictions

A delay in filing for the S Corp election will likely result in a business needing to file two separate tax returns at the end of the year. Generally, if a business files as an S Corporation after its deadline, it will be taxed as one entity type for part of the year and then as an S Corp for the remainder. Tax elections allow a legal entity to be treated as a “tax entity”, which is not a created entity but simply a taxing designation.

In addition to developing policies to direct the administration and day-to-day operations of the organization, they are responsible for making judgments on significant matters impacting the shareholders. To uphold their duty of care to the shareholders and the corporation, the elected board of directors’ members must act in the best interests of both parties. S corporations can have no more than 100 shareholders, and all shareholders must be U.S. citizens or resident aliens. This can be a disadvantage if the business needs to raise capital by selling equity to investors.

California Corporation

A company can enter into contracts, accrue debt, and acquire assets in its own name after it is incorporated, making it an independent legal entity from its owners. Alternatively, double taxation is easily avoided by other totally appropriate and viable business entity structures. Further, because a corporation is its own person, an additional set of tax returns must be prepared and filed.

What are the disadvantages of partnership?

  • the liability of the partners for the debts of the business is unlimited.
  • each partner is 'jointly and severally' liable for the partnership's debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts.

You will likely need a lot of startup capital to get a corporation running, in addition to paying the filing charges, ongoing fees and larger taxes. Alongside the lengthy application process is the amount of time and energy necessary to properly maintain a corporation and What is the Difference Between Bookkeeping and Accounting adhere to legal requirements. You have to follow many formalities and heavy regulations to maintain your corporation status. For example, you need to follow your bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create annual reports.

BrewerLong Can Design Your Perfect Business Entity

A partnership is similar to a sole proprietorship with the exception being that there is more than one proprietor. When you choose to list your business as a Sole Proprietorship, you declare that you will be the sole owner and operator of that business. For example, historically it has been easier to incorporate in some states such as Delaware than in other states such as California. Thus, if a corporation defaults, the creditors have no recourse against the owners. 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.

disadvantages of corporation

An S corporation is a corporation that is treated, for federal tax purposes, as a pass-through entity through an election made with the Internal Revenue Service (IRS). One of the most prominent disadvantages of incorporation is that company profits are often double taxed. There are many legal documents that need to be filed if you choose to incorporate your business. An example of when a sole proprietorship would be a viable business structure is in the case of a freelance writer. This business owner works alone on writing projects for business clients.

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