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Should you structure your new company as a corporation?

On Behalf of | Apr 14, 2024 | Business Law

When deciding on the appropriate structure for a new business, you may wonder whether it could be to your advantage to form it as a corporation. 

The decision to form a company in any particular way results in significant legal and financial implications. Therefore, understanding the benefits and potential drawbacks of a corporate structure is necessary for the purposes of informed decision-making. 

Potential advantages

A major advantage of structuring your business as a corporation is that shareholders benefit from limited liability protection. This means that if legal issues or a need to file for bankruptcy arise, personal assets such as your house, car and savings should remain protected from creditors.

Another compelling reason to choose a corporate structure is the ability to raise capital. Corporations can issue shares of stock, which can be a potent tool for raising funds. This capacity to sell equity to investors not only provides a solid foundation for growth but also diversifies the risk associated with the business.

Potential drawbacks

From a tax perspective, corporations are often seen as less favorable due to the potential for double taxation—once at the corporate level and again at the individual level when dividends are distributed to shareholders. However, this can sometimes be mitigated through an S corporation tax election, which allows profits and losses to be passed through directly to shareholders’ personal tax returns.

It is also worth noting that the process of setting up and maintaining a corporation can be more complicated and expensive than other business structures. Corporations require compliance with more regulations and tax requirements, including the need for detailed record-keeping, periodic filings with government bodies and maintaining a board of directors.

It is finally worth noting that most companies do not start as corporations. Most start as sole proprietorships, partnerships or limited liability companies (LLCs). Nevertheless, this broader trend doesn’t mean that you should structure your new company one way or another. It simply means that you should consider your options carefully before committing to one over the others.