Thinking of Forming a Corporation? Here are the Pros and Cons

​When you start a new business, your decision to incorporate or not is a critical one. Sole proprietorships (narrow scope), partnerships (not as much protection from personal liability) and limited liability companies (LLCs) are other kinds of legal business structures to consider. Corporations, like any other legal structure, have specific benefits and drawbacks. The nature and your kind of business will be a deciding factor if you should incorporate or not.

PROS
Legal Liability Protection for Owner: When the new owner(s) of the business have successfully incorporated, they have a reduced level of legal responsibility for the corporation's business functions and debts, since the law sees the corporation as an independent entity. For the corporation to keep its limited liability status, the owners have to adhere to certain mandatory legal corporate formalities.

Ability to Attract Investors: The Corporation can attract investors by issuing stock to provide capital for expansion of the business.

Power Structure: Corporations have a proven power and management framework that includes directors, officers as well as shareholders. The roles and responsibilities are clearly outlined for the various groups in the corporate structure.

Employee Stocks and Stock Options: Large corporations have the ability to offer stock benefits and stock options (employees can buy the stock at a predetermined price) as an appealing option for potential employees.

CONS
Time and Expense of Incorporation: Incorporating is a time-consuming and costly process. Numerous documents have to be prepared (like articles of incorporation and bylaws for the new corporation), along with filing fees that are paid to the Secretary of State Office or similar agency in your state.

Following Corporate Procedures: All corporations have to follow certain corporate procedures by law, which guarantees that the corporation is functioning as a separate entity, independent of the owners of the business.  These steps consist of regular directors meetings, maintaining corporate activity records and sustaining the continuing financial autonomy of the corporation.
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Potential Tax Liability: Traditional corporation profits might be "double taxed." This means that profits earned by the corporation itself are taxed and individual stockholders who received dividends from the corporation are taxed too. This usually happens in bigger corporations and might not affect the owners and stockholders of smaller corporations because they are usually employed by the business itself and get salaries, which is a tax deduction for the smaller corporation instead of dividends. The tax status of an "S" corporation is a possible solution to double-taxation.