Disadvantages of A Corporation


Time and Money. Corporations are costly and time consuming ventures to start and operate. Incorporating requires start-up, operating, and tax costs that are not required of most other structures.

Double Taxing.  In some cases, corporations are taxed twice - first, when the company makes a profit, and again when dividends are paid to shareholders.

Additional Paperwork. Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and record keeping burdens associated with this entity.

Types of Legal Organizations

In some cases, the business you do may be regulated and some business types may not be acceptable. For example, the Alcoholic Beverage Control Commission will not issue a license to sell alcoholic beverages to a sole proprietorship or a member-managed limited liability company. To save time, money and frustration, take the time to find out everything you can about the requirements for your new business before you file the organization papers.

It is important to consider each form of business organization carefully to evaluate the most appropriate structure for your business. While it is possible for a business to start out under one organizational form and change to another later, proper planning can prevent difficulties caused by an unsuitable legal structure. Seek counsel from an accountant or attorney to determine the form of business organization that best suits your business.

The success of your new business depends on planning. The following is a list of company types with a short description of the characteristics of that company type. The bold bullet under each description is the paperwork needed to file with the West Virginia Secretary of Stateís office.

Advantages of A Corporation


Limited Liability. When it comes to taking responsibility for business debts and actions of a corporation, shareholdersí personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.

Ability to Generate Capital. Corporations have an advantage when it comes to raising capital for their business - the ability to raise funds through the sale of stock.

Corporate Tax Treatment. Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.

Attractive to Potential Employees. Corporations are generally able to attract and hire high quality and motivated employees because they offer competitive benefits and the potential for partial ownership through stock options.

Sub Chapter S Corporation - Advantages / Disadvantages



An S Corporation is not a separate form of
legal structure, but rather a special tax status
granted by federal tax law to a corporation to
tax the businessí income like a partnership
or a sole proprietorship. A corporation elects
S Corporation status by filing with the IRS on
Form 2553, ìElection by a Small Business Corporation.î
Generally, the election must be filed
within 75 days of incorporating. Otherwise, a
corporation may not change its status until
the beginning of each new calendar year.
Form 2553 must to be filed by March 15th to
be effective for the new tax year. Once elected,
S Corporation status will continue until the
shareholders revoke the choice or a corporation
no longer meets the qualifications.

Advantages ó 

An S Corporation has all the
general advantages of ìregularî corporations
except it does not pay corporate income taxes.
It divides the expenses and income among its
shareholders. Individual shareholders report
profits and losses on their personal income tax
returns.
Disadvantages ó 

To apply for S Corporation
status the business must comply with the
following restrictions:

ï It must be a domestic corporation. It cannot
be a financial institution using the reserve
method of accounting for bad debts, an
insurance company, a corporation that takes
tax credits for doing business in a U.S. possession,
or be a domestic international sales
corporation (DISC).
ï It may only have one class of stock issued
and outstanding.
ï It may not have accumulated earnings and
profits at the close of each three consecutive
taxable years if 25 percent of its gross
receipts for each of the years are passive investment
income. Passive investment income
includes royalties, rents, dividends, interest,
annuities, and sales or exchanges of stocks
or securities.
ï It may have a maximum of 75 shareholders.
It may not have as a shareholder any person
who is not an individual except certain
qualifying trusts or certain qualifying exempt
organizations. Shareholders must be U.S.
citizens or resident aliens.
ï It must have a tax year ending December 31.
ï All shareholders must agree to elect S Corporation
status.

While an S Corporation is not subject to
double taxation as a regular corporation, it loses
the ability to deduct the full cost of medical
insurance as a business expense under current
tax law. Corporate officers are still treated as
employees. There are also differences in how
business losses are carried forward, which
may be positive or negative depending upon
the individual situation. A competent tax advisor
should be consulted before applying for S
Corporation tax status. It is important to note
that the corporation must file the ìArticles of
Incorporationî with the Secretary of State before
it can apply to the IRS for S Corporation
status. For more specific information about
qualifying and applying as an ìSî Corporation,
contact the IRS.

What Is A General Partnership?

A partnership exists when two or more persons join together in the operation and management of business for profit. Partnerships, like sole proprietorships, are subject to relatively little regulation and are fairly easy to establish. A formal partnership agreement is recommended in order to address potential conflicts before they arise. Under a general partnership, each partner is liable for all debts of the business. All profits are taxed as income to the partners based on their percentage of ownership.

Advantages 
Easy to establish 
Unlimited liability for at least one partner
Larger pool of expertise
More sources of capital
Partners control decision-making
Tax advantages

Disadvantages
Unlimited liability for at least one partner
Partnership terminates with incapacity or withdrawal
Difficult to raise capital
Divided authority
Tax advantages

What Is A Sole Proprietorship?

SOLE PROPRIETORSHIP
A sole proprietor is an individual who owns and operates the business. There is no legal separation between the individual and the business. A person benefits from 100 percent of the profits and is personally responsible for 100 percent of all the debts and liabilities of the business. 

Advantages:
Easy to establish
Owner controls decision making
Low start-up costs
Tax advantages
Easy to terminate business

Disadvantages
Unlimited liability
All profits retained by owner
Difficult to raise capital
Inexperience of single owner
Limited continuity in case of illness/death of owner

Board of Directors, Officers and By-Laws

Board of Directors, Officers and By-laws 

All corporations must have an organizational structure and rules or bylaws by which they are managed. The organizational structure is comprised of directors and officers, which handle the internal management of the corporation. The internal management of the corporation is regulated by the corporate bylaws and the Articles of Incorporation. Incorporating Your Business in North Carolina 9 

Directors 
Directors are those persons who are responsible for the management of the corporation. A corporation is required to have at least one director, or it may have more. The Articles of Incorporation or the bylaws may contain provisions for electing the directors. The directors are elected or appointed in the manner and for the terms as provided in the Articles of Incorporation or bylaws. 

Officers 
The day-to-day management of the corporation is provided by the officers of the corporation. The officers are elected or appointed as prescribed in the bylaws and their performance is overseen by the directors. If there is no such provision for their election or appointment, the officers are usually elected or appointed annually by the board of directors. The officers usually consist of a president, one or more vice-presidents, a secretary, a treasurer, and any other officer deemed necessary. 

Bylaws 
A set of rules known as the bylaws governs the internal administration and regulation of the affairs of the corporation. The bylaws may contain any provisions not inconsistent with the law or the Articles of Incorporation. The initial bylaws must be adopted by the incorporators or board of directors. A complete set of the bylaws, however, will not be filed with the N.C. Department of the Secretary of State.

Corporation - Advantages / Disadvantages

corporation is owned by its shareholders and
run by a board of directors elected by the
shareholders. In a large corporation, the directors
hire corporate officers to manage the dayto-
day operations of the business. In a small
corporation, the directors and the corporate
officers are usually the same individual(s). Corporations
are created by filing ìArticles of Incorporationî
with the Secretary of State and by
adopting bylaws. There are certain formalities
a corporation must adhere to, including:

ï Procedures for annual shareholder meetings
ï The election of the board of directors
ï Maintenance of corporate records
ï Adoption of bylaws
ï Complete separation of personal and business
finances, and
ï Proper filings with the Secretary of State. Although
many of the requirements may seem
unnecessary for a small corporation, they are
important to preserve the corporate form.

Advantages ó 

A corporation is a legal entity
separate from the owners. It is like a person
with a life of its own. This creates a wall of
separation that normally limits a stockholderís
liability to the amount of investment in the corporation.
If an owner dies or wishes to sell his/
her interest, the corporation continues to exist
and do business. This adds stability to its existence.
Once a corporation has been established
through the Secretary of State, no other
business may register with the Secretary of
State using the same name.

Disadvantages ó 

While a corporation limits
an ownerís liability, the owner(s) and/or the
corporate officers may still be held responsible
if the ìcorporate veilî has been pierced. The
ìcorporate veilî can be pierced in a number of
ways, primarily by the personal actions or guarantee
of an owner. Corporate profits may be
subject to double taxation. A corporation must
pay tax on income as a separate legal entity. If
profits are distributed to shareholders, they are
also subject to taxation as part of the individual
shareholderís income.

Selecting A Business Structure in Texas

The decision regarding business structure is a decision that a person should make, in consultation with an attorney and accountant, and taking into consideration issues regarding tax, liability, management, continuity, transferability of ownership interests, and formality of operation.

Generally, businesses are created and operated in one of the following forms:


*  Sole proprietorship: The most common and the simplest form of business is the sole proprietorship. In a sole proprietorship, a single individual engages      in a business activity without necessity of formal organization. If the business is conducted under an assumed name (a name other than the surname of the     individual), then an assumed name certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a       business premise is maintained. If no business premise is maintained, then an assumed name certificate should be filed in all counties where business is      conducted under the assumed name.
    
*  General partnership: A general partnership is created when two or more persons associate to carry on a business for profit. A partnership generally       operates in accordance with a partnership agreement, but there is no requirement that the agreement be in writing and no state-filing requirement. If the     business of the partnership is conducted under an assumed name (a name that does not include the surname of all of the partners), then an assumed name       certificate (commonly referred to as a DBA) should be filed with the office of the county clerk in the county where a business premise is maintained. If      no business premise is maintained, then an assumed name certificate should be filed in all counties where business is conducted under the assumed name.
    
*  Corporation: A Texas corporation is created by filing a certificate of formation with the Texas Secretary of State. The Secretary of State provides a form    that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.

   A corporation is a legal person with the characteristics of limited liability, centralization of management, perpetual duration, and ease of          transferability of ownership interests. The owners of a corporation are called ìshareholders.î The persons who manage the business and affairs of a       corporation are called ìdirectors.î However, state corporate law does provide for shareholders to enter into shareholdersí agreements to eliminate the       directors and provide for shareholder management. Choosing the best management structure for your corporation is a decision you make with the advice of an    attorney. The Secretary of State cannot assist you.

   An ìSî corporation is not a matter of state corporate law but rather a federal tax election. A for-profit corporation elects to be taxed as an ìSî         corporation by filing an election with the Internal Revenue Service. Please contact the IRS or competent tax counsel regarding the decision to be taxed as    an ìSî corporation and the requirements for filing the election. This is not a matter with which the Secretary of State may assist.
    
*  Limited Liability Company: A Texas limited liability company is created by filing a certificate of formation with the Texas Secretary of State. The       Secretary of State provides a form that meets minimum state law requirements. Online filing of a certificate of formation is provided through SOSDirect.

   The limited liability company (LLC) is not a partnership or a corporation but rather is a distinct type of entity that has the powers of both a       corporation and a partnership. Depending on how the LLC is structured, it may be likened to a general partnership with limited liability, or to a limited     partnership where all the owners are free to participate in management and all have limited liability, or to an ìSî corporation without the ownership and     tax restrictions imposed by the Internal Revenue Code. Unlike the partnership, where the key element is the individual, the essence of the limited       liability company is the entity, requiring for its creation more formal requirements. 1 William D. Bagley & Phillip P. Whynott, The Limited Liability       Company, ß2.10, (2d ed. 2d rev. James Publishing, 1995).

   The owners of an LLC are called ìmembers.î A member can be an individual, partnership, corporation, trust, and any other legal or commercial entity.       Generally, the liability of the members is limited to their investment and they may enjoy the pass-through tax treatment afforded to partners in a       partnership. As a result of federal tax classification rules, an LLC can achieve both structural flexibility and favorable tax treatment. Nevertheless,       persons contemplating forming an LLC are well advised to consult competent legal counsel.

   A limited liability company can be managed by managers or by its members. The management structure must be stated in the certificate of formation.       Management structure is a determination that is made by the LLC and its members. The Secretary of State cannot give advice about management structure.
   
 * Limited Partnership: A Texas limited partnership is a partnership formed by two or more persons and having one or more general partners and one or more       limited partners. The limited partnership operates in accordance with a partnership agreement, written or oral, of the partners as to the affairs of the      limited partnership and the conduct of its business. While the partnership agreement is not filed for public record, the limited partnership must file a      certificate of formation with the Texas Secretary of State. The Secretary of State provides a form that meets minimum state law requirements. Online         filing of the certificate of formation is provided through SOSDirect.
   
*  Limited Liability Partnership: In order to limit the liability of its general partners, a general or limited partnership may opt to register as a limited     liability partnership. The Secretary of State provides a form for registration as a limited liability partnership. Online filing of the registration is       provided through SOSDirect.

   The information on this page should not be considered a substitute for the advice and services of an attorney and tax specialist in deciding on the          business structure.

What Is the Best Type of Business Structure for My Business?

Types of Business Structures / EntitiesÖÖÖ.
What type of business entity do you have? The structure your business assumes is important in determining your limitations and liabilities. Depending on the type of structure you choose, additional paperwork may be necessary to establish the business in your state. Your accountant or attorney can help you decide what type of business structure best fits your needs. 
Sole Proprietorship
A sole proprietorship is the form of business entity with the least amount of legal formalities. In a proprietorship, the owner assumes sole responsibility for the operations and finances of the business, including profit and loss. In the proprietorship form of business entity, the owner's personal property is tied directly to the business; therefore, the owner assumes unlimited risk of his personal assets. 
"C" Corporation
Corporations are a separate entity from its owners. Corporations provide the shareholders with the most protection from liability and responsibility from debts and contracts. Profits for a corporation are taxed at the corporate level when the income is earned and is also taxed at the individual shareholder level. 
"S" Corporation
An "S" Corporation is similar to a corporation in that it provides its shareholders with protection from liability. However, unlike a corporation, an "S" corporation is exempt from federal income tax. Instead the taxes are paid solely by the individual shareholders. 
General Partnership
General Partnerships require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay tax, but must file an informational return, while individual partners report their share of profits and losses on their personal return. Short term partnerships are also known as joint ventures. 
Limited Partnership
A limited partnership is a form of business organization that offers some of the partner's limited liability. It consists of a general partner who organizes and manages the partnership and its operations, and limited partners who contribute capital but have limited liability and assume no active role in day-to-day business affairs. 
Limited Liability Partnership
LLP's are organized to protect individual partners from personal liability for the negligent acts of other partners or employees not under their direct control. LLP's are not recognized by every state and those that do, sometimes limit LLP's to organizations that provide a professional service, such as medicine or law, for which each partner is licensed. Partners report their share of profits and losses on their personal tax returns. Check with your Secretary of State's office to see if your state recognizes LLP's and if so, which occupations qualify. 
Limited Liability Company
A Limited Liability Company (LLC) is a combination of the corporate and partnership forms of business. In an LLC, parties control shares of the company and like corporations, and their liability for the operations of the company is determined by their level of investment. However, like partnerships, income tax is not paid at the LLC level, but rather it is "passed through" and taxed at the shareholder level. This somewhat complicated form of business entity should be discussed further with an attorney or accountant to determine if it will fit your needs. 

Nonprofit Corporations - What Are They?

NPCs are a type of corporate entity that limits payment or distribution of any part of its assets, income, or profit except in conformity with the purposes of the corporation. Members of the corporation may only receive profits in conformity with the purposes of the corporation. Generally, a NPC is created under state stautes. However, there are many special acts that permit the formation of a wide variety of NPCs. Some purposes for which NPCs are commonly formed are those involving religious, educational, and charitable activities. To create a NPC, Articles of Incorporation must be filed with the Secretary of State, Bureau of Commercial Services, Corporation Division. Some NPCs may be eligible for exemption from federal income taxes. Contact the IRS at 877.829.5500 or access Publication 557 ìTax Exempt Status for your Organizationî on-line along with the accompanying package ìApplication for Recognition of Exemptionî - Form 1023 under Section 501(C) (3) online at www.irs.gov.

What Is A Limited Partnership?

Like a general partnership, a limited partnership has two or more participants. In a limited partnership, there are two types of partners. A general partner has the same rights, powers, and restrictions as a partner in a general partnership. A limited partner is typically not liable for the obligations of the partnership. General partners may receive cash or other assets as provided in the partnership agreement and also incur unlimited liability. Limited partners can only receive a share of profits based on the allocation in the partnership agreement, and they do not have a voice in the management of the business.

Advantages 
Easier to establish than a corporation
Lower start-up costs
Not liable for associates negligence or malpractice
Tax advantages

Disadvantages
Partners personally liable for contractual
obligations and debts

Basic Business Structures

Sole Proprietorship

The sole proprietorship is a simple, informal structure that is inexpensive to form; it is usually owned by a single person or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.

Limited Liability Company (LLC)

The LLC is generally considered advantageous for small businesses because it combines the limited personal liability feature of a corporation with the tax advantages of a partnership and sole proprietorship. Profits and losses can be passed through the company to its members or the LLC can elect to be taxed like a corporation. LLCs do not have stock and are not required to observe corporate formalities. Owners are called members, and the LLC is managed by these members or by appointed managers.

General Partnership

Partnerships are inexpensive to form; they require an agreement between two or more individuals or entities to jointly own and operate a business. Profit, loss, and managerial duties are shared among the partners, and each partner is personally liable for partnership debts. Partnerships do not pay taxes, but must file an informational return; individual partners report their share of profits and losses on their personal return. Short-term partnerships are also known as joint ventures.

C Corporation (Inc. or Ltd.)

This is a complex business structure with more startup costs than many other forms. A corporation is a legal entity separate from its owners, who own shares of stock in the company. Corporations can be created for profit or nonprofit purposes and may be subject to increased licensing fees and government regulation than other structures. Profits are taxed both at the corporate level and again when distributed to shareholders.

Shareholders are not personally liable for corporate obligations unless corporate formalities have not been observed; such formalities provide evidence that the corporation is a separate legal entity from its shareholders. Failure to do so may open the shareholders to liability of the corporation's debts. Corporate formalities include:

    * issuing stock certificates
    * holding annual meetings
    * recording the minutes of the meetings
    * electing directors or ratifying the status of existing directors

Corporations should always be assisted by a qualified attorney.

Sub Chapter S Corporation (Inc. or Ltd.)

This structure is identical to the C Corporation in many ways, but offers avoidance of double taxation. If a corporation qualifies for S status with the IRS, it is taxed like a partnership; the corporation is not taxed, but the income flows through to shareholders who report the income on their individual returns.
     

File A Business Corporation


File a Business Corporation Online

    * Articles of Incorporation must be filed (signed by at least one incorporator) with the Department of State.
    * Personal liability is limited, for shareholders.
    * The life-span of the business is perpetual; or for a designated period stipulated in the Certificate of Incorporation
    * For purposes of taxation* a corporation pays state franchise taxes and taxes on income; shareholders pay taxes on income distributed as dividends (a       limited exception exists for "Subchapter S" corporations).