Incorporation Drawbacks

Although there are many benefits to incorporating a business, there are also additional requirements that must be complied with when setting up your business as a corporation, which to most, can be viewed as a drawback. These drawbacks include: double taxation, maintaining corporate formalities, and the costs associated with maintaining and running a corporation.

Double-Taxation

Corporations are themselves tax-paying entities.  If a Corporation earns a profit, that profit is taxed.  If those profits are then distributed to its shareholders, the shareholders pay income taxes on those dividends.  There are two ways to avoid this.  First, if your company breaks even each year, there will generally be no corporate-level tax.  Many small business owners break even by paying themselves a bonus at the end of the year equal to what the company’s profits would otherwise have been.  That bonus is usually taxable as ordinary income but is not double-taxed.  Second, if you form an S Corporation you can avoid the possibility of double-taxation altogether by having the company’s profits and losses flow directly to your personal income tax return.

Corporate Formalities

Among other things, corporations are required to have regular meetings of a board of directors and an annual meeting of shareholders.  LLCs and Sole Proprietors are not subject to the same level of corporate formalities.

Costs of Incorporating

It does cost money to incorporate and maintain a corporation.  It also requires filing documents with the government.  However, CorpNet™ document filing services can assist you in forming your corporation or Limited Liability Company (LLC) for as little as $49 plus state filing fees. This is substantially lower than what an attorney might charge for the same service. CorpNet™ can help you complete the process and save you both time and money with service that is fast, reliable, and affordable backed by a 100% satisfaction guarantee…or your money back! 

In addition to the initial filing, you will be required to file an annual report along with a fee each year to the State in which you incorporated within to stay in corporate compliance with the state.  Also, you will need to prepare, or have prepared, a separate tax return for the corporate entity.  CorpNet strongly recommends that you consult your tax accountant or tax advisor for more information about your corporation’s tax filings.