Comparing Business Types: Advantages and Disadvantages
- August 13th, 2014
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Comparing business types is important when deciding what kind of company you want to start. Whether you choose the structure of your business from the different kinds of partnerships or the different types of corporations, there will be advantages and disadvantages of whatever option you choose. There are many advantages to starting a C Corporation, but with that come several disadvantages as well. In order to make the best decision for your company, you need to be aware of every factor.
Comparing Business Types: Advantages of C Corporations
Contrary to one of the biggest disadvantages of a partnership, when you own a C Corporation, individuals are not liable for the debts and actions of the company. That’s not to say that individuals will never be held responsible for things that occur at the business, because there are certainly times where that could happen, but as far as debts/profits/income tax are concerned, the corporation acts as an independent entity, so backlash never falls on shareholders or owners in that regard. Shareholders will typically only be held accountable for their shares of the company, meaning that if the share price drops, then that will affect them, but no other elements that affect the business will fall back on them.
Corporations have a unique ability to generate their own capital, because they’re able to sell stock of the company. If your company needs to generate a certain amount of money, you have the option of selling a certain percentage of the company in stock—just be mindful of how much of your company you’re willing to sell off.
As independent entities, C Corporations file taxes separately from their owners and shareholders. Owners and shareholders are only responsible for paying the regular tax rate on corporate profits they receive through salaries, bonuses, and dividends. Any additional profits received, such as distributions, are taxed under the corporate tax rate, which is usually lower than their personal income tax rate.
Corporations are typically able to offer extremely competitive benefits to potential employees, which increases the quality of the candidates interested in applying to work there. They also have the option to provide stock options to employees, which is an attractive draw for potential employees.
Comparing Business Types: Disadvantages of C Corporations
Unlike one of the business partnership advantages, C Corporations are both time consuming and costly to start up. The operation and tax costs of corporations are also much higher than other types of businesses.
Corporations are sometimes taxed twice—the first time when the company makes a profit, and the second when dividends are paid to shareholders. One of the S Corporation advantages is being able to avoid this aspect of corporation taxation.
Corporations are highly regulated by the government, on a federal, state, and sometimes even local level, which means there’s a greater deal of paperwork to be filed and maintained, as well as a greater necessity for accurate recordkeeping.
To learn more about comparing business types in order to help you make a decision about what kind of business you should start, call the tax professionals at JRH & Associates at (516) 794-5752! Our experts are waiting to help you!