Forms of Business Ownership
Review this overview of the various forms of business ownership, including advantages and disadvantages, to learn about some of the factors that go into deciding which form is best for any given situation. No hard and fast formula helps an entrepreneur pick the proper form. However, there are some important considerations, such as risk, taxes, transferability, and even image. After you read, complete the concept check questions about the different types of business structures: sole proprietorship, partnership, and corporations.
Corporations: Limiting Your Liability
Disadvantages of Corporations
Although corporations offer companies many benefits, they have some disadvantages:
- Double taxation of profits. Corporations must pay federal and state income taxes on their profits. In addition, any profits (dividends) paid to stockholders are taxed as personal income, although at a somewhat reduced rate.
- Cost and complexity of formation. As outlined earlier, forming a corporation involves several steps, and costs can run into thousands of dollars, including state filing, registration, and license fees, as well as the cost of attorneys and accountants.
- More government restrictions. Unlike sole proprietorships and partnerships, corporations are subject to many regulations and reporting requirements. For example, corporations must register in each state where they do business and must also register with the Securities and Exchange Commission (SEC) before selling stock to the public. Unless it is closely held (owned by a small group of stockholders), a firm must publish financial reports on a regular basis and file other special reports with the SEC and state and federal agencies. These reporting requirements can impose substantial costs, and published information on corporate operations may also give competitors an advantage.