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Disadvantages of Forming a Corporation

You Cannot Personally Own a Corporation and Could Lose Control of the Business

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Corporations offer a business many advantages, but there are also disadvantages that must be considered:

Double Taxation

C corporations pay taxes on profits when corporate income is distributed to owners (shareholders) in the form of dividends. This is the first taxation.

The shareholders who receive dividends must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money.

The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is an out. Choose the IRS’ "S Corporation" tax status to avoid double taxation.

Expensive to Form

There are many filing fees associated with forming a corporation. Nonprofits must file even more paperwork because they must apply to the IRS for tax exemption status (minimum $750 to apply). In a few states, nonprofits may also have to file separately for state tax exemption status. Even small fees can add up if you are cash-strapped already.

Corporations Can be Complicated to Form

Corporations must file Articles of Incorporation with the state they are incorporating in for which states charge different filing fees. They may also need to file Bylaws, which may require the help of an attorney to write.

Most states also require corporations to file annual documents and/or franchise tax fees. Nonprofits typically also have to pay fees for registering their charity each year.

Although many entrepreneurs do file all their own paperwork, if you are new to business you should at least consult with a business attorney before attempting to form a corporation on your own.

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