What is the Disadvantage of a Corporation?

Brief Summary of Text

• Greater Regulations – Regulations can add to the cost of doing business
• Cost of Organization – Corporations are more expensive to set-up
• Record Keeping – shareholders may be legally penalized for not keeping accurate record keeping
• Double Taxation – the corporation pays taxes on the corporate income and the shareholder pays taxes on the dividends paid by the corporation
• Director and Shareholder Liability – Generally the shareholders of the corporation have limited liability but under certain state regulations and acts the shareholders of the corporation may be held liable for the acts of a corporation

There are disadvantages to using a corporation to conduct business.  These should be considered carefully before selecting the corporation to carry on business.

• Greater Regulation A corporation can be subject to greater regulation that  can add to the cost of doing business.  Various regulations may have to be complied with, for example, to sell shares, or raise capital.  
• Cost of Organization:  The cost of organization for a corporation can be greater than for a sole proprietorship or a partnership.  As well, there will be legal fees involved.
•  Record Keeping:  A corporation will be required to keep records of its shareholders, directors and officers, any changes of the shareholders, directors and officers, as well as records of its debts.  Records of various other transactions or changes in he corporation must also be kept.  Some of the records are open to public inspection; for example, anyone could have access to the list of shareholders although the new Business Corporations Act does have some restrictions.
• Double Taxation:    Depending on what special  rights and restrictions are attached to the shares, and how the profits of the corporation are paid out to the shareholders, there is the possibility of double taxation:  the corporation must pay taxes on its profits and the shareholder may be  subject to taxation on the profits paid out.  This can result in greater taxation than if a corporation was not used for the business.
• Director and Shareholder Liability:   While the general rule is limited liability, there are situations where directors and even shareholders of a corporation could be held personally liable for certain acts or failures of the corporation.  There are many statutes that created personal liability on the part of directors and even shareholders.  Also, the directors or shareholders might engage in activities, or fail to take certain steps, that could create personal liability. Without proper legal advise on the activities of a corporation, the benefits of using a corporation to conduct business could be lost.

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