Advantages & Disadvantages of Forming a Corporation
When starting your own business it is important to understand the different types of business formations. Depending on the legal structure of your business, the advantages and disadvantages of each can change greatly. The following explains the advantages and disadvantages of forming a corporation.
For more information on LLC formation, please visit our post on the Advantages and Disadvantages of Forming a LLC.
A key benefit of forming a corporation is providing limited liability for its owners (with the “corporate veil”). Alternatively, with a sole proprietorship or partnership the owners are personally liable for the debts and liabilities of the business. In these cases, creditors may go pursue personal assets to collect on debts of the business. A properly formed and operated corporation protects its owners from liability. However, the “corporate veil” can be pierced creating liability for the business owners if an officer or shareholder acts negligently or the corporation does not follow the proper corporate formalities. Such formalities include having separate bank accounts, holding meetings, and keeping minutes.
Unlike a sole proprietorship or partnership, a corporation can exist perpetually.
A corporation and all of its assets and accounts may be transferred by the issuance of a stock certificate. This can help a business raise money as investors can be brought in. On the other hand, sole proprietorships and partnerships require that each of the individual assets must be transferred, and the accounts, licenses, and permits must be individually transferred.
With the issuance of stock, the owner(s) of a corporation can share its profits while bringing in investors without giving up control.
Time and Cost
Forming a corporation requires fees and time-consuming filings, including preparing the business’ articles of incorporation and bylaws.
In order to preserve limited liability (and to follow laws), corporations are required to follow corporate formalities to ensure that the business is operating as a separate entity, independent of the business’ owners. Some of these formalities include holding regular meetings, keep accurate records of the business’ activities and maintaining financial independence from the owners.
A corporation is governed by a board of directors and laws regulate who can serve on a board of directors. In fact, family members and spouses cannot serve on a small corporation’s board at the same time. Also, a corporation’s founder could be fired from the company by the board of directors.