To continue our National Small Business Week series on potential business structures for small businesses, let’s look at the corporation. Coming in varying shapes and sizes, corporations offer advantages and disadvantages that should be carefully considered before deciding to incorporate.
Yesterday we discussed limited liability companies (LLCs). Today, the corporation. Though often considered the heavy-weight of business organizations, the corporation can come in many varieties, such as the “close” (aka “closely held”) corporations owned by few, or S corporations.
So, what are the basic advantages and disadvantages of incorporating?
- limited liability for the business owners;
- defined ownership and power structure; and
- the ability to bring in investors by selling stock.
Disadvantages include:
- potentially higher taxes, with the corporation taxed, as well as any dividends to shareholders;
- the expense and time required by the formalities of incorporation;
- the need to follow corporate formalities (director meetings, additional record-keeping, etc.).
One way in which many small businesses avoid some of the disadvantages of incorporation is to incorporate as an S corporation.
Close corporations, which are owned by few people instead of public shareholders, also allow some of the benefits of the corporate form, without the need to strictly adhere to many of the formalities required of larger corporations.
Visit the website of your state’s Secretary of State for information about the rules governing corporations in your state.
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