Advantages and Disadvantages of Corporations

A corporation is an artificial person created through state charter. As a legal person, the corporation can enter contracts, own property and hire employees; and is a separate taxpayer from its owners, the shareholders.

Advantages of Incorporation

Limited liability:

  • The shareholders are not liable for the debts and liabilities of the corporation beyond their contributions to capital. However, lenders will usually require personal guarantees by the shareholders on loans to the corporation.

  • Continuity:

  • The corporation continues in existence, even if its shareholders die.

  • Ease of transfer:

  • Shares of stock can be easily transferred to children or other buyers to raise capital or for estate distribution purposes.

  • Centralized management

  • The shareholders elect the Board of Directors, who manages the affairs of the corporation, including appointment of officers.

  • Tax and fringe benefits

  • Tax-qualified retirement plans
  • Medical and disability plans
  • Group life insurance
  • Split-dollar insurance plans
  • Salary continuation plans

  • Disadvantages of Incorporation

  • Cost to establish a corporation
  • Need to observe corporate formalities
  • Double taxation of income if dividends are paid. Possible tax on excess corporate accumulated earnings.