Disadvantages of C Corporations
And, of course, the flip side. Our expert was meticulous enough to tell us of the advantages of forming a corporation. So let’s hear the negatives.
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And, of course, the flip side. Our expert was meticulous enough to tell us of the advantages of forming a corporation. So let’s hear the negatives.
- More red tape
In addition to having more paperwork and recordkeeping requirements—in order to maintain the corporate veil of limited liability—corporations must ensure they meet all annual report filings and, in some circumstances, SEC requirements as well. Incorporation takes a lot of organization and maintenance, and you will want to know all you can about its operations and costs. Of the major types of legal entities, C corporations and S corporations have the most burdensome requirements with regard to the formalities of formation and existence. In addition to filing articles of incorporation with the state where it is organized, they must also adopt bylaws, elect a board of directors, hold organizational meetings and regular board and shareholders’ meetings, and keep minutes of such meetings. In addition, each state in which they operate has its own corporate requirements, such as qualifying to do business, that must be observed.
- Cost of incorporating
Besides the usual filing fees required by state agencies for articles of incorporation, name reservation, and issuing stock, and often for appointing an in-state registered agent to receive legal process, legal fees will often run between $500 and $1,000, even for a simple incorporation. If you need to obtain a permit from the state to issue stock or securities, legal fees can be much more.
- Double taxation
While this section has outlined a number of important tax advantages of incorporating a business, the picture is not all that one-sided. Regular corporations (C corporations) have one major potential disadvantage that usually does not exist for other legal forms of doing business: potential double taxation of its earnings. This problem arises because a C corporation must first pay corporate income taxes on its taxable income. Then, the after-tax earnings may be subject to a second tax on either the individual stockholders if the earnings are distributed as dividends or as a corporate penalty tax if the earnings are not distributed as dividends.
- Higher tax rate for personal service corporations
Certain kinds of corporations, called qualified personal service corporations (QPSCs), are taxed at a flat rate of 35 percent, instead of the graduated tax rates found in the currently applicable corporate tax rate table. While it may not always be clear whether an incorporated service business is a QPSC, the IRS defines a QPSC by these characteristics: At least 95 percent of the value of its stock is held by employees or their estates or beneficiaries; and the employees perform services at least 95 percent of the time in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.
Source: Michael D. Jenkins, an attorney and CPA (www.roninsoft.com)—He is the author and principal editor of the million-selling state-specific book series, Starting and Operating a Business in the US. He is also the owner of Ronin Software and currently authors and publishes the Starting and Operating a Business book series as user-customizable electronic books, for each state. Contact him by email at mdjenk@aol.com.
