Incorporating a business has disadvantages to consider before making the choice. It takes longer and is more expensive to set up than other structures. Shareholder’s liability is limited to the amount invested. But forced to pay annual state franchise tax with little revenue in return. Extra paperwork like tax returns and annual reports are required. Shareholders must keep personal and corporate finances separate. Other expenses like bank accounts are also needed.
Not eligible for personal tax credits so every dollar earned is taxed. Operating business risks incurring losses or debts it cannot pay. If operates as proprietorship, personal assets can be seized to pay debts.
Loss of Control and Eligibility for Tax Credits
Can lose control as it creates separate legal entity, distinct from founder. No strict rules on when to incorporate. Signs include quickly growing team, managing contracts, protecting name and high-risk industry. Before incorporating, consider if tax disadvantage for business. Sole proprietor may claim credits corporation cannot.
When to Incorporate
No strict rules on when to incorporate but signs include growing team and high-risk industry. Consider tax disadvantage before incorporating.
Summary of Incorporation Drawbacks
- Takes longer and more expensive to set up than other structures.
- Forced to pay state franchise tax with little revenue in return.
- Extra paperwork required.
- Shareholders must keep finances separate.
- Not eligible for personal tax credits.
- Risks incurring losses or debts which could impact personal assets.
- Can lose control due to the business becoming a separate legal entity.