Various businesses want to save by incorporating taxes but this depends whether these companies have corporate social responsibility. A company that is in Corporate social responsibility has the greatest advantage because it avoids double taxation. Corporate social responsibility has the disadvantage of being taxed at the individual and corporate level. Companies in Corporate social responsibilities are taxed from their business profits and shareholders have to pay additional money they take from the corporation including their dividends and bonuses. On the other hand, profits from the Corporation are given to the shareholders and later they pay taxes for these profits, which is similar to sole proprietorship taxing and partnership taxing. The Corporations do not pay any income taxes thus allowing the corporation to incorporate tax savings.
Corporations distribute money to employees or shareholders as profits rather than as salaries. This advantage stems from the fact that profits are not entitled to more than 15% security and medical taxes (Friedman, 2009). Corporation taxes are controlled by accounting procedures hence it is the obligation of the shareholders to discuss with their accountant to incorporate tax advantages.
These corporations have the advantage of limited liability where both the directors and shareholders are shielded from debts of the company. Conversely, sole proprietorship and partnership businesses risk to loss their assets to cover their votes. Corporations have the advantage of issuing stock to their shareholders (Friedman, 2009). Selling stock is a strategy for attracting outside investors; this is an advantage of Corporations over LLC. LCC gives certificates to their shareholders instead of issuing stock. There is continual existence of corporation since they are not dependent on its owners. In the case where an owner dies or decides to sell his shares, business will continue unless the business is formally dissolved. This is one of the advantages of the Corporations over sole proprietorship businesses. The corporation can also be used to own assets such as real estates because they have tax advantage and they are protected from liability.
It is obvious that the advantages of a Corporation surpass its disadvantages. Corporations are structured is a way that is beneficial especially in times of transferring ownership. These types of advantages are not available to sole proprietorship and partnership businesses.
Corporations protect personal assets of shareholders hence individuals are not liable to the corporations debts. Creditors do not have the mandate to pursue personal assets of individuals such as houses and banks to pay business debts. Sole proprietorship and partnership businesses do not have protection from the creditors since the business and the individual are considered the same.
Most corporations are exempted from paying federal taxes at the corporate level. Incomes or losses from the business are passed to the shareholders who later report it to personal income tax returns. Therefore, losses of the income tax can offset shareholders tax returns. This advantage is beneficial especially in the starting phase of a new business.
Shareholders of Corporations can be employees of the corporation and get salary from the corporation as employees. It is also possible for the shareholders to get dividends from the corporation and other benefits that are not taxed to their involvement in the business. Reasonable characterization of distribution of dividends is advantageous to owners of the business since it reduces individual tax. The owner is able to generate businesses expenses while receiving wages.
Transfer of Ownership
Assets in Corporations are transferred smoothly without incurring large amount of consequences. This is not the case in LLC and partnership businesses since transfer of more that half of the assets can lead to termination of the business. Corporations do have to deal with complex accounting rules when transferring ownership or make changes to property ownership.
Operating in a Corporation might assist new business gain credibility from potential customers, vendors and partners because it is a reflection that owners of the business are seriously committed to their business.
Formation and Ongoing Expenses
Before operating a Corporation, it is necessary to incorporating the business by filling the required articles of incorporation by desired means of incorporation (Riley, 2010). It is also necessary to pay the required fees and register to the required agent of the company. Some states introduce fees and taxes such as annual report. However, this fee is not expensive and can be reduced as cost of doing business. This kind of fee is not encountered by sole proprietorship and partnership businesses.
Tax Qualification Obligation
There are mistakes that result to termination of a Corporation. This mistakes are connected to election, stock ownership and filling requirements (Riley, 2010). Even though these minor errors can be rectified immediately, they are not experienced by sole proprietorship and partnership business.
Restrictions in Stock Ownership
Corporations can own only one class stock even though it can also have voting and non-voting shares. This means there cannot be different class of investors with different dividends or distributions rights. There can never be more than one hundred shareholders and foreign ownership is not allowed.
Scrutiny of IRS
IRS closely scrutinizes payments made to confirm the reality because they can be distributed as dividends or salary. This means that wages can automatically be characterized as dividends hence costing the corporation reductions of the compensation paid. Consequently, the dividends can also be characterized as wages that make the company suffer employment tax liability.
Allocating Income and Loss
Since there is one class of stock restriction, it is difficult for corporations to decide which shared holder should bear which loss and gain what profit. Allocating income and loss is determined by stockownership unlike in partnership business where allocation is decided during creation of the business.
Corporations have both advantages and disadvantages described briefly. Corporations have the greatest advantage because it avoids double taxation. It is obvious that the advantages of Corporation surpass its disadvantages. Corporations protect personal assets of shareholders hence individuals are not liable to the corporations debts. Shareholders of Corporations can be employees of the corporation and get salary from the corporation as employees.
Corporations can own only one class stock even though it can also have voting and non-voting shares. Before operating a Corporation, it is necessary to incorporating the business by filling the required articles of incorporation by desired means of incorporation.
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(2012). Advantages to S Corporations Versus C Corporations – S Corporation Tax Advantages. Retrieved on March 8 2012 from,