• Forming a corporation offers many advantages including limited liability, potentially favorable tax treatment and enhanced business credibility. Nevertheless, there are certain inevitable disadvantages that must be taken into consideration. In addition, certain problems can be avoided as long as they are anticipated in advance.
  
  

Incorporating in the Wrong State

• Different states have different incorporation laws and corporate tax structures. Although Delaware is the most popular state in which to incorporate, incorporators should take into consideration where the company will be doing business and what type of business it will engage in. There is no requirement that a corporation do business in the state in which it incorporates.
  
  

Improperly Drafted Bylaws

• All corporations should draft a set of bylaws, which act as a corporate constitution. State law partially determines the content of such documents, and inappropriately drafted bylaws can lead to disputes and unintended consequences years down the road.
  
  

Undercapitalization

• Corporations do not provide unlimited liability protection. If the corporation is too thinly capitalized to meet reasonably foreseeable corporate liabilities (such as debts), a court may "pierce the corporate veil" and reach the personal assets of shareholders in order to satisfy corporate debts.
  
  

Failure to Observe Corporate Formalities

• Shareholders meetings must be held at least once a year, and the various states have their own requirements regarding when directors must meet. Minutes of these meetings must be kept, and major corporate decisions should be evidenced by formal written resolutions. Corporate contracts must be signed and sealed by appropriate legal representatives.
  
  

Failure to Obtain Proper Business Licenses

• Although state governments incorporate businesses, many local governments require business licenses. Additionally, many professions and industries require licenses to practice certain trades.
  
  

Failute to Register in Each State in Which the Corporation Does Business

• A corporation formed in one state and doing business in another must register as a "foreign corporation" with the state government and submit itself to taxation by that state.
  
  

Failure to Update Corporate Information

• The Secretary of State of the state of incorporation should be notified whenever there is a change in shareholders, directors, registered agent or registered address. Some states have more extensive updating requirements.
  
  

Double Taxation

• Unless a corporation elects tax treatment under Subchapter S of the Internal Revenue Code (by filing IRS Form 2553), corporate income will be taxed twice: once when the corporation receives it, and once when it is distributed to shareholders and employees. Not all corporations are eligible for Subchapter S tax treatment.
  
  

Overdeclaration of Dividends

• When dividends are declared, shareholders are taxed on this income, and the corporation cannot deduct these amounts from its taxable income. This is a good reason to be judicious about declaring dividends.
  
  

Separate Corporate Tax Returns

• Corporations must file their own separate tax returns, and this will not relieve shareholders from the responsibility of filing individual 1040 tax returns. Although S corporations pay no federal income taxes, they must still file informational tax returns with the IRS.