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Corporations Compared to Sole Proprietorships and
Partnerships
Corporations enjoy many advantages over partnerships and sole proprietorships.
But there are also disadvantages. We cover the most important ones below.
Advantages:
Stockholders are not liable for corporate debts. This is the most
important aspect of a corporation. In a sole proprietorship and partnership, the
owners are personally responsible 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 bank account, house, etc. to make up the
difference. On the other hand, if a corporation runs out of funds, that is it.
The corporation's owners will not be on the hook.
Please note that under certain circumstances, an individual stockholder may be
liable for corporate debts. This is sometimes referred to as "piercing the
corporate veil." Some of these circumstances include:
If a stockholder personally guarantees a debt.
 | If personal funds are intermingled with corporate funds. |
| 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
law. |
Continuous life. The life of a corporation, unlike that of a
partnership or sole proprietorship, does not expire upon the death of its
stockholders, directors 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. New bank accounts and tax identification numbers will
also be required.
Disadvantages
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 hand written agreement.
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, with a maximum of $434 per employee.
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