Are There Disadvantages to Incorporating a Business in San Diego?

incorporating a business in san diegoIncorporating your business can be beneficial in many important ways.  Incorporating makes it easier for you to transfer an ownership share in your business or for your business to pass to heirs upon your death.  Incorporating can also provide you with protections from personal liability and ensure you do not risk your individual assets for the debts of the company.

The advantages of incorporating, however, are only half of the story.  Forming a corporation or operating your business as a corporate entity can also have some disadvantages as well. A business law attorney at Sepahi Law Group, APC can represent you during the process of organizing your business entity and can advise you on what the right legal structure is for your organization. Call today to speak with a member of our legal team and to learn more about how we can represent you.

Disadvantages to Incorporating

Some of the disadvantages to incorporating your business include the following:

  • Initial startup costs. There are initial costs associated with starting a corporation including attorney’s fees, corporate registration, the purchase of a corporate minute book, the printing of stock certificates, and the printing of any necessary material with the corporate name.  Opening a bank account for the corporation may also require a substantial initial deposit.
  • Ongoing costs. There are annual fees associated with operating a corporation that must be paid in order to maintain active corporate status.  Corporations also must file a separate tax return from individual business owners, resulting in higher accounting costs.
  • Strict separation of corporate funds is required. For many sole proprietors, their business and personal funds are mixed and money is withdrawn from the corporation as needed. When a business is incorporated, all business funds must be kept strictly separate from personal funds in order to preserve the liability protections and other benefits of the corporation. This can result in additional expenses for bookkeeping and can also cause personal cash flow problems for some individuals who are used to spending money as it comes in to the business.
  • Tax issues.  If a corporation is organized as a C-corporation, there is a risk of double taxation. Money will be taxed when it is earned by the company and again on the personal income taxes of the owners.  An S-corp avoids this double taxation but if an S-corp owner is actively involved in the business and takes large distributions while paying himself too low of a salary, this can trigger an Internal Revenue Service (IRS) audit.

These are a few of the key downsides associated with incorporating a business in San Diego. An experienced attorney at Sepahi Law Group, APC can help you to determine if forming a corporation is the right choice for your business.

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