The 7 Benefits of Forming a Corporation

The purpose of an LLC is to protect its members from any liability. If the company fails to meet its obligations, then creditors can target only the LLC, not the assets of the members. However, there are certain situations in which an LLC can be automatically dissolved, leaving members open to risk. Although an LLC does come with plenty of advantages, there are some disadvantages to consider. LLC members also have to pay a self-employment tax, which includes a 12.4% tax for Social Security and a 2.9% tax for Medicare. Most states require filing articles of organization with the secretary of state, and some states allow for them to be filled out online.

Corporation ownership is based on the percentage of stock ownership, which offers much more flexibility than other entity types in terms of transferring ownership and perpetuating the business for the long term. Each an advantage of a corporation is that owner of the corporation generally owns a percentage of the company based on the number of shares they hold. Since corporation shares are easy to buy or sell, ownership of a corporation is easily transferable.

List of the Cons of Corporations

Single-member LLCs are automatically taxed like sole proprietorships and multi-member LLCs are automatically taxed like partnerships. In either case, company profits pass through to the members, and the members pay income and self-employment taxes on their share. But an LLC can also elect to be taxed as a C corp. or–if it qualifies–an S corp. C Corporation is the most common form of incorporation among businesses and contains almost all of the attributes of a corporation.

• It requires a great deal more paperwork, meeting many more guidelines, electing a board of directors, adopting bylaws, having annual meetings, and creating formal financial statements.
• For their owners, both a limited liability company (LLC) and a corporation offer similar legal advantages.
• Most convictions lead to financial penalties, but Martin Grass, the former CEO of Rite-Aid, received a plea agreement to serve eight years in prison for his conduct.
• Nonprofits have specific tax advantages, including the ability to file for nonprofit tax-exempt status with the state and federal governments.

In addition, utilizing limited liability companies (LLCs) as a business entity have new rules to comply with due to passage of the Minnesota Revised Uniform Limited Liability Company Act of 2015. The law states the land-owning LLC and its members must be the ones farming the land on behalf of the owner LLC. If the owner LLC rents the land to someone else, even another member of the LLC who then farms it personally, homestead classification is lost and therefore the qualified farm property estate exclusion is also lost. New LLCs must have complied with the new law as of August 1, 2015. Existing LLCs must have complied with the new law by January 1, 2018. While Coastal Oil concerned splitting up an existing business solely to gain a tax benefit, Borge addressed incorporation of a loss-generating business for the tax benefit of the incorporator.

Should You Change Your Sole Prop to a Corporation?

Its shareholders profit through dividends and stock appreciation but they are not personally liable for the company’s debts. If you want to form a corporation, it will require investing more money and time than if you went with another business entity. You will need to file the appropriate registration, fulfill capital requirements, and formally list your corporate directors among other things. Although specific details regarding the transfer of ownership depend on the governing agreement in the bylaws and articles of incorporation, ownership of this entity type is often easy to buy and sell. For example, if an owner wants to leave a company, they can simply sell off their stocks. Similarly, if an owner dies, their ownership stocks can easily transfer to someone else.

Overall, corporations are more difficult to establish and result in more costs for the initial owners. Since the shareholders of the company cannot continuously monitor the operations of corporations, it may promote fraudulent activities by the management. While this problem has existed for all corporations for a long time, there is no definite solution to it. Corporations can also be disadvantageous as a form of business.

Disadvantages of forming a corporation

There can be monthly reporting duties for sales taxes and local duties. Even the annual tax deadline for C-corporations is a month earlier than it is for private citizens. It is a complex system that often requires the help of a Certified Public Accountant to navigate.