Disadvantages to a Corporation
Like most things in life, everything has a lot of good things about it as well as a few bad things, incorporating your business not being an exception to this. Above I discussed and listed some advantages to incorporating your business. Now I’ll discuss some of the disadvantages or the bad things of incorporating, all of which should be taken like a grain of salt. Everything has good and bad points to it, but one or the other shouldn’t necessarily determine whether or not you do something.
The prime drawback to incorporating is what we call double taxation. When a corporation generates profit, the profit that is made is taxed twice when they are distributed to the corporation’s shareholders as dividends. The income is first taxed when it comes into the corporation and again once it becomes income of the shareholder. The corporation can do a few things to eliminate the taxes they pay. For instance, for all reasonable business expenses such as salaries, they can be used as deductions against the corporate income which can eliminate some of the double taxation.
The double tax can actually be completely eliminated by making an S corporation election. What is that, you ask? There is almost always a way to avoid or go around anything legal, otherwise know as loopholes. In this business, all standard business corporations or C corporations are required to pay income tax on all the taxable income that the corporation generates. By making a subchapter S election (which involves you completing and filing the federal Form 2553 with the IRS) you can avoid having your corporation be taxed as a separate entity.
Don’t let all this legal stuff confuse you or let you turn away from this. It may sound like it involves a lot of work, but trust me, doing this will really help your corporation in the end. I mean, who wants to give more money to the government voluntarily? Certainly not me; At least, not if I don’t have to. By going this route you can definitely save yourself and your corporation a lot of money in the long run, so stay with me on this.
