Corporation vs Sole Proprietorship Corporations vs. Partnership Advantages and Disadvantages
Comparison of Corporations to Sole Proprietorships and Partnerships
Advantages and Disadvantages
Corporations enjoy many advantages over business partnerships and sole proprietorship. But there are also disadvantages. Check out the Advantages and Disadvantages.
Stockholders are not liable for corporate debts. This is the most important advantage of a corporation. In a sole proprietorship and partnership, the owners are personally liable for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal assets. to make up the difference. On the other hand, if a corporation runs out of funds, its owners are usually not responsible.
Under certain circumstances, an individual stockholder may be liable for corporate debts. This is sometimes known to as "piercing the corporate veil".
If a stockholder personally guarantees a debt.
If personal funds are intermingled with funds of the corporation.
If a corporation fails to have director and shareholder meetings.
If the corporation has minimal capitalization or minimal insurance.
If the corporation fails to pay state taxes or otherwise violates state tax law.
Continuous life. The life of a corporation, unlike that of a business partnerships and sole proprietorship, does not expire upon the death of its stockholdersdirectors or officers.
Easier to raise money. An corporation has many avenues to raise capital. It can sell shares of stock, and it can create new types of stock, such as preferred stock, with different voting or profit characteristics. Plus, investors will rest assured that they will not be personally liable for corporate debts.
Ease of transfer. Ownership interests in a corporation may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses and permits must be individually transferred, and new bank accounts and tax identification numbers are required.
Higher cost. Corporations cost more to set up and run than a sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees. These costs are partially offset by lower insurance costs.
Formal organization and corporate formalities. A corporation can only be created by filing legal documents with the state. In addition, a corporation must adhere to technical formalities. These include holding director and shareholder meetings, recording minutes, having the board of directors approve major business transactions and corporate record-keeping. If these formalities are not kept, the stockholders risk losing their personal liability protection. While keeping corporate formalities is not difficult, it can be time-consuming. On the other hand, a sole proprietorship or partnership can commence and operate without any formal organizing or operating procedures - not even a handwritten agreement.
Self Employment Tax Savings. Earnings from a sole proprietorship are subject to self-employment taxes, which are currently a combined 15.3%. With a corporation, only salaries (and not profits) are subject to such taxes. This advantage is most significant for stockholder-employees who take a salary of less than $72,600.
Unemployment tax. A stockholder-employee of a corporation is required to pay unemployment insurance taxes on his or her salary, whereas a sole proprietor or partner is not. Currently, the federal unemployment tax is 6.2% of the first $7,000 of wages paid.