Disadvantages of Corporations
Double Taxation Double Taxation: Depending on what special rights and restrictions are attached to the shares, and how the profits of the corporation are paid out to the shareholders, there is the possibility of double taxation: the corporation must pay taxes on its profits and the shareholder may be subject to taxation on the profits paid out. This can result in greater taxation than if a corporation was not used for the business.
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. The corporation itself does not pay taxes twice, but just the sound of “double taxation” can make potential business owners cringe. However, there is an out. Choose the IRS’ “S Corporation” tax status to avoid double taxation.
In other systems, dividends are taxed at a lower rate than other income)(for example, in the US) or shareholders are taxed directly on the corporations profits and dividends are not taxed Double taxation is levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of income taxes), or financial transaction (in the case of sales taxes). This double liability is often migrated by tax treaties between countries.
Example: You decide to set up a corporation and have a profit of 1,000,000 in the first year. Suppose the government taxes corporate profits at 30%, then the corporation has to pay 300,000 in taxes. It is decided that 500,000 will be distributed as dividends and the dividend tax is 10%, so you will lose a further 50,000 to the government when you file your personal taxes. This is the concept of double taxation: first the company was taxed for its profits, and later shareholders were taxed for their dividends. (https://www. boundless. om/business/types-business-ownership/corporations/disadvantages-corporations/) In many countries, corporate profits are taxed at a corporate tax rate, and dividends paid to shareholders are taxed at a separate rate. Such a system is sometimes referred to as “double taxation”, because any profits distributed to shareholders will eventually be taxed twice. One solution to this (as in the case of Australian and UK tax systems)is for the recipient of the dividend to be entitled to a tax credit, which addresses the fact that the profits represented by the dividend have already been taxed.
The company profit being passed on is therefore effectively only taxed at the rate of tax paid by the eventual recipient of the dividend. In other systems, dividends are taxed at a lower rate than other income (for example, in the US) or shareholders are taxed directly on the corporation’s profits and dividends are not taxed. For example, S corporations in the US do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders.
The shareholders must then report the income or loss on their own individual income tax returns. For C corporations, the corporation ends up paying taxes twice. First, when the C corporation turns a profit, it pays a corporate tax rate on the profit amount. The second time the C corporation pays taxes is when it pays dividends to shareholders. Many businesses that incorporate choose to incorporate as an S corporation instead in order to avoid paying taxes twice. The only difference between a C corporation and an S corporation is a tax designation filed with the IRS using Form 2553.
According to the IRS, an S corporation can choose to pass the income, losses, deductions and credit for the corporation through to the shareholders of the corporation for federal tax purposes. This avoids the double taxation possibility a C corporation is subject to. Double taxation. A possibility of “double taxation may arise on the dividends it pays. The corporation is taxed on its income. Then, if the corporation distributes some of the net income to the stockholders as a dividend, the dividend will be taxed again on the stockholders’ personal income tax returns.
In case of corporations there is double taxation. First of all the corporate income is taxed at a flat rate and then the dividends paid to the shareholders is taxed. It may result to double taxation. Since the corporation is already taxed on its income, distributing this income to shareholders in the form of dividends may result to double taxation. This is because the dividend income received by the shareholders (natural persons) is also taxed on their personal income tax returns. Director and shareholder liability
Director and Shareholder Liability: While the general rule is limited liability, there are situations where directors and even shareholders of a corporation could be held personally liable for certain acts or failures of the corporation. There are many statutes that created personal liability on the part of directors and even shareholders. Also, the directors or shareholders might engage in activities, or fail to take certain steps, that could create personal liability. Without proper legal advise on the activities of a corporation, the benefits of using a corporation to conduct business could be lost.
Record keeping Record Keeping: A corporation will be required to keep records of its shareholders, directors and officers, any changes of the shareholders, directors and officers, as well as records of its debts. Records of various other transactions or changes in the corporation must also be kept. Some of the records are open to public inspection; for example, anyone could have access to the list of shareholders although the new Business Corporations Act does have some restrictions. Corporations need to maintain more records than other business entities.
Corporations must file annual reports and tax returns and maintain business bank accounts and records that are separate from personal accounts. Shareholder meeting records, board of director meeting records, licenses and other corporate records also are necessary. (http://smallbusiness. chron. com/advantages-disadvantages-corporate-form-business-4389. html) Cost of organization Cost of Organization: The cost of organization for a corporation can be greater than for a sole proprietorship or a partnership. As well, there will be legal fees involved. There are many filing fees associated with forming a corporation.
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. The fees and legal costs required to form a corporation may be substantial, especially if the business is just being started and the corporation is low on financial resources. * The fees and legal costs required to form a corporation may be substantial, especially if the business is just being started and the corporation is low on financial resources. The fees and legal costs required to form a corporation may be substantial, especially if the business is just being started and the corporation is low on financial resources. One of the primary disadvantages of a corporation is the costs for running a corporate form of business. It costs money to incorporate with the state where the business operates. You can choose to hire an attorney or accountant to help you complete the incorporation paperwork, but it is not a requirement. If you incorporate directly with the Secretary of State, as of 2010, the fee ranges from $99 to $150.
Beyond the initial incorporation fees, the corporate form of business also has ongoing fees associated with it. An annual report fee can range up to $150 a year for each year the corporation exists after the initial incorporation filing. . Incorporation is costly. Incorporating a business needs to file with the Securities and Exchange Commission (SEC) and may involve a lot of formal and legal papers, such as by laws, articles of incorporation, affidavit and board resolutions. This is sometimes done by getting the service of a corporate attorney or firms which are specialized in incorporating a business.
It may also require higher amount of initial or paid-up capital for other types of corporation like financing and lending corporations. Furthermore, the amount of subscribed capital is taxed with documentary stamp tax, which may result to additional expenses to be incurred by the incorporators. (http://businesstips. ph/advantages-and-disadvantages-of-forming-a-corporation/) Greater Regulation Greater Regulation A corporation can be subject to greater regulation that can add to the cost of doing business.
Various regulations may have to be complied with, for example, to sell shares, or raise capital. (http://www. whatisacorporation. com/html/disadvantages_of_corporation. html) Complexity in organization and regulation. To incorporate a business, an application with the Securities and Exchange Commission must be filed and approved. A higher capital requirement is also sometimes required for other type of corporations. Once approved, the corporation must comply with the numbers of regulations and reportorial requirements which are specifically implemented for corporations. http://businessaccent. com/2009/02/07/what-are-the-advantages-and-disadvantages-of-forming-a-corporation/) Corporations are highly regulated. Ordinary corporations are regulated by the SEC. Special corporations may be required with secondary licenses and are further regulated by other government agencies, such as Bangko Sentral ng Pilipinas (BSP) for financing and lending companies, Commission on Higher Education (CHED) for companies operating secondary schools and Insurance Commission (IC) for insurance companies.
Moreover, corporations also need to comply with the quarterly or annual reportorial requirements with the SEC and other agencies requiring those reports for certain types of corporations. This also means that the more compliance it requires, the more paper works and cost it involves. And when there are more to comply, bigger penalties are awaiting to be paid if they are not complied. Corporations can be 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. 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. Although many entrepreneurs do file all their own paperwork, if you are new to business you should at least consult with a business attorney before attempting to form a corporation on your own. (http://womeninbusiness. about. com/od/corporations/a/corp-disadvant. tm) Establishing a corporation is a complex process and requires registration with the central regulatory authority and listing on a stock exchange which required fulfillment of certain requirements related to the amount of capital, number of directors, etc. Ownership Another disadvantage of corporations is that, as Adam Smith pointed out in the Wealth of Nations, when ownership is separated from management (i. e the actual production process required to obtain the capital), the latter will inevitably begin to neglect the interests of the former, creating dysfunction within the company.
Some maintain that recent events in corporate America may serve to reinforce Smith’s warnings about the dangers of legally protected, collectivist hierarchies. Centralized management. Its centralized management restricts a more active participation by stockholders who are not major owners in the conduct of corporate affairs. Normally the corporations have a large number of shareholders; they delegate the governance function to a body of persons called board of directors. The