| Advantages: |
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Limited
liability: A corporation provides its shareholders
with protection over their personal wealth in the event
that the corporation is unable to pay its obligations.
In such events, the creditors or other claimants are
limited to the assets of the corporation sold through a
bankruptcy / liquidation procedure. Still, there are
certain possibilities that a shareholder can be
personally liable for corporate obligations, i.e.: |
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If
a corporation does not keep proper records and does not
have director and shareholder meetings.
In
certain cases, negligence on meeting capital
requirements and necessary insurance coverage.
If a
shareholder is also a director, then he/she could be
liable under various laws that govern the practices of
board of directors and management.
In
the event that a shareholder has agreed to a personal
guarantee of a corporate obligation (i.e. a loan from a
bank).
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Flexibility
of ownership & funding: Acquiring the business
of a partnership or proprietorship entails the
individual transfer of assets (i.e. business licenses
granted to a sole proprietor) and of liabilities (i.e.
bank accounts). In contrast, buying shares in a
corporate structure is relatively easy. |
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Easier
to attract good management: A corporation has
flexibility on building various reward structures to
entice good management and improve employee
performance. |
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Perpetuity: A corporation is a
legal entity that has no finite life (i.e. not limited
by the life of its shareholders). This perpetuity could
give an extra comfort to entities dealing with a
corporation rather than with a sole proprietorship
(where the death of the proprietor could provide no
remedy).
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Disadvantages:
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Costs of formation
and operation:
Both the formation and the operating costs for a
corporation are higher than those for a partnership or a
sole proprietorship.
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Taxes:
Having a corporate structure could result to certain
additional taxes (i.e. the federal
unemployment tax (FUTA)of 6.2%, with a maximum of
$434 per employee). [Taxation issues are complex and
need to be consulted with a tax specialist; i.e. in this
example, the FUTA can be alleviated by 5.4% if the
employer pays state unemployment taxes on a timely
manner.]
Back to Incorporation
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