Disadvantages of Incorporation

Double taxation

Because a corporation is a separate legal entity, its earnings are subject to federal and state income taxes. If any of the corporation's after-tax earnings are paid out as dividends, the earnings are taxed again as income to the stockholders.

Limited liability

Because creditors can lay claim only to the assets of the corporation, they may limit their loans to the level secured by those assets of a corporation or require stockholders to guarantee the loans personally.

Government regulation

Corporations are subject to greater control and regulation than are other forms of business. They must file many reports with the state in which they are chartered. Publicly held corporations must also file reports with the Securities and Exchange Commission and with the stock exchanges on which they are listed. They must also maintain internal controls and have audits conducted in compliance with regulations set by the Public Company Accounting Oversight Board (PCAOB). meeting these requirements is also very costly.

Separation of ownership and control

Management sometimes makes decisions that are not good for the corporation. Poor communication can also make it hard for stockholders to exercise control over the corporation or even to recognize that management's decisions are harmful.