Advantages and Disadvantages of Corporations

A corporation is a separate legal entity organized and operated under state law. Like a legal person, the corporation can enter contracts, own property, and hire employees. A corporation is a separate and distinct taxpayer from its owners, the shareholders.

Advantages of Incorporation

  • Limited liability: The shareholders are not generally 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 or sell their shares.
  • Centralized management: The shareholders elect the Board of Directors, who manage the affairs of the corporation, including the election 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 and maintain a corporation.
  • Need to observe corporate formalities.
  • Double taxation of income if dividends are paid. Possible tax on excess corporate accumulated earnings.