What Are the Pros and Cons of Forming a Corporation?


Quick Answer

The pros of forming a corporation include tax advantages, separate liabilities by owners and the opportunity for investors to invest in the corporation. The cons of forming a corporation include the money it costs to incorporate and more paperwork to incorporate and file.

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Full Answer

Generally, business owners form corporations for protection against legal and financial liabilities, which keep owner's bank accounts and personal assets separate from the corporation. Forming a corporation can be expensive with costs such as franchise tax, state filing fees and other government-imposed costs. Corporations need to file bylaws, corporate minutes, Articles of Incorporation and certificates of good standing on a regular basis. Taxes are filed on separate forms, and business owners cannot claim any personal tax credits on their corporate tax returns. Business losses must be reported on the business returns, not personal tax returns.

A business can choose to incorporate as a limited liability company, a C corporation or an S corporation. Each has its own organizational, administrative and taxation rules. The corporate structure on which the business owner decides may allow him to pass through the taxation on his own personal taxes, or he can avoid double taxation. If the corporation owes debts or is involved in litigation, the shareholders and owners can't be sued personally or held liable for the business debts.

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