Question

Which amongst these is a disadvantage of incorporating a company?

• A. Separate identity
• B. Formation do expensive
• C. Detailed winding up procedures
• D. Co-operate disclosures

Answer 1

Answer: (A)

Separate identity

There are various disadvantages of incorporation of a company

• Cost – The initial cost of incorporation includes the fee required to file your articles of incorporation, potential attorney or accountant fees, or the cost of using an incorporation service to assist you with completion and filing of the paperwork. There are also ongoing fees for maintaining a corporation.
• Double Taxation – Some types of corporations such as a C Corporation, have the potential to result in “double taxation.” Double taxation occurs when a company is taxed once on profits, and again on the dividends paid to shareholders.
• Loss of Personal “Ownership” – 
If a corporation is a stock corporation, one person doesn’t retain complete control of the entity. The corporation is governed by a board of directors who are elected by shareholders.
• Required Structure – 
When you form a corporation, you are required to follow all of the rules outlined by the state in which you filed. This includes the management of the corporation, operational requirements and the corporation’s accounting practices.
• Ongoing Paperwork – Most corporations are required to file annual reports on the financial status of the company. The ongoing paperwork also includes tax returns, accounting records, meeting minutes and any required licenses and permits for conducting business.
• Difficulty Dissolving – While perpetual existence is a benefit of incorporating, it can also be a disadvantage because it can require significant time and money to complete the necessary procedures for dissolution.
• Lifting of Corporate Veil – From the juristic point of view, a company is a legal person distinct from its members. This principle may be referred to as the ‘Veil of incorporation’. The courts, in general, consider themselves bound by this principle. The effect of this Principle is that there is a fictional veil between the company and its members. That is, the company has a corporate personality which is distinct from its members.