S Corporation Disadvantage #2: Extra Banking and Legal Work

S Corporation Disadvantage #2: Extra Banking & Legal Costs

Unfortunately, a corporation may have extra banking and legal costs as compared to a sole proprietor.

Banks, for example, may charge more for checking accounts, loans and other services.

The S corporation may more frequently require the services of a good attorney to help with the legal aspects of starting and operating the entity (probably either a traditional corporation or a limited liability company) that elects Subchapter S status.

Finally, state governments, their agencies, and even other outside parties may require a business that's setup as a corporation to jump through additional legal or accounting hoops or to pay more in fees and taxes simply and only because of the corporate form.

Here are just three examples of these extra "hoops:"

To get a contractor's business license in Arkansas, for example, a corporation must supply CPA-reviewed or CPA-audited financial statements, but a sole proprietor doesn't have to. Paying a certified public accountant for a financial statement review typically costs several thousand dollars and paying a CPA for an audit can easily cost ten or twenty thousand dollars.
A number of states make a corporation pay significant extra fees or taxes that a sole proprietor doesn't have to pay. California, for example, may require an annual franchise fee of several hundred or even several thousand dollars a year. Note that the California franchise fee runs a minimum of $800 a year and applies both to limited liability companies and to S corporations.
Massachusetts may levy an extra tax on S corporations once the corporation reaches a specified size.

Back to list of S corporation advantages and disadvantages

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