Corporation advantages and disadvantages
/What is a Corporation?
A corporation is a legal entity whose investors purchase shares of stock as evidence of their ownership interest in it. This entity acts as a legal shield for its owners, which means that they are generally not liable for the corporation's actions, though they can benefit from dividend payments and any appreciation in the value of their shares. A corporation has most of the rights and obligations of an individual, such as being able to enter into contracts, hire employees, own assets, incur obligations, and pay taxes. It is organized under state law. The interests of shareholders are represented by a board of directors, which they elect.
What are the Advantages of a Corporation?
The advantages of the corporation structure are as follows:
Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability, so their personal assets are protected. This is a particular advantage when a business routinely takes on large risks for which it could be held liable.
Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds. This is a particular advantage when its shares trade on a stock exchange, where it is easier to buy and sell shares. A privately-held corporation will have a more difficult time selling shares, since it does not have access to the public markets.
Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held. In the latter case, buyers may demand a discount before they will purchase shares, since they may have a difficult time selling the shares to other investors at some point in the future.
Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.
Pass through. If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.
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What are the Disadvantages of a Corporation?
The disadvantages of a corporation are as follows:
Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
Excessive tax filings. Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation, as noted earlier.
Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.
A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on a stock exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held.