Establishing a business corporation can be a complex process because of the amount of requirement and paper work in fulfilling the state’s laws on incorporation. Securing large amounts of capital can be daunting alone. We can also see that there are a lot of management issues concerned in corporations, as well as challenges concerning shareholders. We could not discount that there are disadvantages of a corporation business that you need to consider.
The Disadvantages of a Corporation Business
I have mentioned in my previous blogs the requirements needed to incorporate. You can just imagine the time needed to fulfill the cost of paperwork to be submitted, including all papers to be done like the articles of incorporation, by laws, records and the like. This pertains to the hassle you need to do prior to the operation of the business. A lot of planning is required for all these documents to be prepared and filed in the proper agency. Now, when you are running the business, the disadvantages are quite different:
- Cost of management. Expect that running a corporation is not an easy breeze. The organizational set-up of corporations is much more complicated than sole proprietorship. This is because you have directors as well as officers who will be included and consulted in all decision making processes. You deal with a lot paperwork with the event of annual meetings, stockholders meetings, corporation’s records, to name a few.
- Record keeping. This is not an option; this is a requirement. An updated record of your officers, directors, major and minor shareholders is needed. Also included are records of your assets and liabilities and debts. Changes in shareholder’s profile as well as selling and buying of shares are put in writing as this will form part of your company’s report for regulation and taxation purposes. Transactions as well as meetings are put in place because some of the records are open to the public such as shareholder’s list with some restrictions.
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3. State regulation. This is one of the most disadvantages of a corporation business. Your corporation needs a lot of compliances to state regulations, and there are stricter penalties once you break these regulations. This would add to your cost of doing business.
4. Shareholder and director liability. There are some instances where the director and shareholders will become liable for certain irregularities in the corporation. Such is the case of negligence, misappropriation, or failures in the company. These are called personal liabilities that are not covered with the limited liability concerning the business as an entity.
5. Conflict of interest. You work with a team of directors and officers, and it can’t be avoided that someone’s self-interest might be a concern while running the corporation.
A Note on Taxes
I want to reiterate the cases on double taxation as one of the forms of disadvantages of a corporation business. This means that shareholders are taxed on the corporation level when you are taxed through the business earnings. You are taxed on the individual level because you are a shareholder. You can change this one once you have dealt with filing of C or S Corporation.