When launching a new business, the type of structure that best aligns with your operational goals and requirements can significantly impact everything from legal protections to tax obligations. Corporations offer distinct advantages — including robust legal protections, centralization of management, and opportunities for growth via stock issuance and dividends — that make them an attractive option for many small businesses. However, incorporation isn’t without its challenges, which can range from costly startup costs to ongoing regulatory compliance requirements.
As a legal entity, corporations have an existence separate from their owners (known as shareholders). This separation of ownership and control provides strong protection against personal liability and can be especially beneficial for businesses that may face increased litigation or risk. For many small businesses, the ability to raise capital and enhance credibility are also important drivers for choosing corporation as their management structure.
The corporate legal structure is subject to more stringent regulatory requirements than other structures, such as sole proprietorships and partnerships. This can create a higher administrative burden and expose the company to fines or legal disputes if not maintained properly. Corporations must maintain separate tax identification numbers and apply for a federal employer identification number (FEIN) in addition to paying corporate taxes, which are taxed at a different rate than personal income.
Incorporating requires a substantial commitment to ongoing compliance, as well as a higher level of professional knowledge and expertise. This is often a reason why companies that choose to incorporate hire a lawyer or certified small business tax specialist to assist with their corporate management and compliance requirements.