Positives and negatives of type of business organization
1. Sole proprietorship 2. Corporation
● What are the positives and negatives of each type of business organization?
● Give an example of each type of business organization listed above.
● Which of the three business organizations is the best in your opinion? Please explain in detail.
A corporation is not for everyone, and it could end up costing you more time and money than it’s worth. Before becoming a corporation, you should be aware of these potential disadvantages: There is a lengthy application process, you must follow rigid formalities and protocols, it can be expensive, and you may be double taxed (depending on your corporation structure).
Filing your articles of incorporation with your secretary of state can be quick, but the overall process of incorporating is often a long one. You will likely have to go through extensive paperwork to properly determine and document the details of the organization and its ownership. For example, Sweeney said you need to draft and maintain corporate bylaws, appoint a board of directors, create a shareholders ownership change agreement, issue stock certificates, and take minutes during meetings.
Alongside the lengthy application process is the amount of time and energy necessary to properly maintain a corporation and adhere to legal requirements. You have to follow many formalities and heavy regulations to maintain your corporation status. For example, you need to follow your bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create annual reports. There are also restrictions on certain corporation types (for example, S-corps can only have up to 100 shareholders, who must all be U.S. citizens).
Most corporations (like C-corps) face double taxation, which means that the business income is taxed at the entity level as well as the shareholder level (based on their percentage of profits earned). The only way around this is to operate as an S corporation. S-corps eliminate this problem by only taxing each shareholder on their individual income, not at the entity level. However, the IRS has been known to pay closer attention to S-corps and even tax them as C-corps if their records fail to meet the legal requirements.
Corporations are expensive to form and operate. It might be easy for established corporations to raise capital by selling shares, but forming and maintaining a corporation can be costly. You will likely need a lot of startup capital to get a corporation running, in addition to paying the filing charges, ongoing fees and larger taxes. When weighing the pros and cons to determine whether a corporation is the right legal structure for your business, consult an attorney and an accountant who are well versed in the implications of creating a corporation.