What Is a Disadvantage of the Corporate Form of Business Entity?

By Heather Frances J.D.

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of transferring ownership shares. Though corporations are very common, a corporation may not be the best structure for every situation, and it does have some disadvantages.

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of transferring ownership shares. Though corporations are very common, a corporation may not be the best structure for every situation, and it does have some disadvantages.

Cost and Paperwork

Corporations require paperwork, including documents like articles of incorporation and annual reports that must be filed with state agencies. Thus, they can be more expensive to start up than other types of business structures. Depending on state law, corporations generally must keep records of annual meetings, share ownership and other corporate formalities. Compared to other business entities, a corporation's record-keeping can be more of a hassle.

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Taxes

In some cases, corporate earnings are double-taxed, meaning they are taxed at the corporate level when the business earns the income, and then taxed a second time at the individual level when profits are distributed. To avoid this double taxation, businesses can be structured as S corporations, which are smaller corporations that are taxed differently than regular C corporations. In an S corporation, earnings flow through to the tax returns of the individual shareholders rather than being taxed at the corporate level.

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References

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