Which of the following describes a disadvantage associated with a corporation

A company is a distinct legal entity separate from its shareholders or officers. Consider this structure if you want limited liability but be aware of strict legal obligations and set up costs.

In Australia, the most common types of company are:

• 'proprietary limited' companies (cannot raise money from the general public through share issues)
• 'public' companies (usually formed to raise or borrow public money by listing the company's shares for trading on a stock exchange).

All companies are governed by the Australian Securities and Investments Commission (ASIC), which administers the Corporations Act 2001 (Commonwealth) and other legislation. Public companies must also comply with the rules of the Australian Stock Exchange.

Advantages of a company include that:

• liability for shareholders is limited
• it's easy to transfer ownership by selling shares to another party
• shareholders (often family members) can be employed by the company
• the company can trade anywhere in Australia
• taxation rates can be more favourable
• you'll have access to a wider capital and skills base.

Disadvantages of a company include that:

• the company can be expensive to establish, maintain and wind up
• the reporting requirements can be complex
• your financial affairs are public
• if directors fail to meet their legal obligations, they may be held personally liable for the company's debts
• profits distributed to shareholders are taxable.

Organizing your business as a corporation offers many advantages, but there are also disadvantages that must be considered.

Sometimes, it is a double-edged sword. The attractive things about a corporation may also present a downside, depending on what your business is or how you would like to run it.

Key Takeaways

• The disadvantages of forming a corporation may depend on you and your goals for your company.
• Corporations have a board of directors, which can complicate decision making and can even result in you losing control of the company.
• Corporations can be expensive and complicated to form depending on the state you're organizing in.
• Forming a corporation could result in double taxation.

See the reasons in this article to determine if the downsides are worth the rewards of forming a corporation.

Distinct Legal Entity

If your business is your idea and passion in life, it is important to understand that you will not be the personal owner. A corporation is a distinct legal entity that is governed by a board of directors.

It is possible that even if you started the corporation, a board could take control of the business, leaving you without a say. A board often has the ability to fire the founder and vote other board members out.

Note

There are federal and state rules and regulations that dictate who can serve on a board of directors. In most cases, family members and spouses cannot serve on a small corporation’s board simultaneously.

If you need to maintain total control of your business, you should consider another form of business structure.

Double Taxation

Another disadvantage of forming a corporation is the double taxation requirement. C corporations pay taxes on profits when corporate income is distributed to owners (shareholders) in the form of dividends. This is the first taxation.

The shareholders who receive dividends must also pay taxes for this distribution on their personal returns. This is the second taxation of the same money.

Note

There is another option within incorporation. You can form an S Corporation tax status to avoid double taxation.

The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is another option. Choose the Internal Revenue Service (IRS) S Corporation tax status to avoid double taxation.

Expensive to Form

There are many filing fees associated with forming a corporation. Formation fees can vary state-to-state, ranging from as little as $45 to as high as $315.

Note

Most states also require corporations to file annual documents and/or franchise tax fees. Nonprofits typically also have to pay fees for registering their charity each year.

Nonprofits must file even more paperwork because they must apply to the IRS for tax exemption status (minimum $750 to apply). In a few states, nonprofits may also have to file separately for state tax exemption status. Even small fees can add up if you are cash-strapped already.

Complicated to Form

Corporations must file Articles of Incorporation with the state they are incorporating in, for which states charge different filing fees. They may also need to file ​bylaws, which may require the help of an attorney to write.

Note

Many entrepreneurs file all their own paperwork. However, if you are new to business, you should at least consult with a business attorney before attempting to form a corporation on your own.

Extensive Rules to Follow

There are many standards required by law on how a corporation governs itself. Corporations must have a board of directors, hold meetings at determined intervals, and keep certain records. If a corporation sells stock or has a membership, there are many other rules that apply.

Starting a business is a big commitment of time, resources, and money. Before deciding on the type of business to form, it is important to weigh all of the pros and cons of each business structure.

Frequently Asked Questions (FAQs)

What are the advantages of forming a corporation?

Some of the advantages of forming a corporation are limited liability, ease of raising money and business name protection.

Which of these is a disadvantage of corporations?

Which of the following is a disadvantage of forming a corporation quizlet?

Which of the following is not an advantage of a corporation quizlet?

Which of the following is a disadvantage of a corporation compared to a sole proprietorship quizlet?