Before you decide to incorporate your small business, consider these disadvantages of incorporation:
1. Cost
The initial cost of incorporation includes the fee required to file your articles of incorporation, potential attorney or accountant fees, or the cost of using an incorporation service to assist you with completion and filing of the paperwork. There are also ongoing fees for maintaining a corporation.
2. Double Taxation
Some types of corporations such as a C Corporation, have the potential to result in "double taxation." Double taxation occurs when a company is taxed once on profits, and again on the dividends paid to shareholders.
3. Loss of Personal "Ownership"
If a corporation is a stock corporation, one person doesn't retain complete control of the entity. The corporation is governed by a board of directors who are elected by shareholders.
4. Required Structure
When you form a corporation, you are required to follow all of the rules outlined by the state in which you filed. This includes the management of the corporation, operational requirements and the corporation's accounting practices.
5. Ongoing Paperwork
Most corporations are required to file annual reports on the financial status of the company. Ongoing paperwork also includes tax returns, accounting records, meeting minutes and any required licenses and permits for conducting business.
6. Difficulty Dissolving
While perpetual existence is a benefit of incorporating, it can also be a disadvantage because it can require significant time and money to complete the necessary procedures for dissolution.
By carefully measuring the advantages and disadvantages of forming a corporation, and consulting with an accountant, attorney and/or other financial professional, you can decide if incorporation is right for your small business.
