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Advantages and Disadvantages of Corporation

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Corporation

A corporation is by far the most complex form of business entity which exists. It requires several forms for the purpose of filing and getting licenses and also need several approvals before it starts functioning. Corporation also have complex tax structure and need to pay dividend tax as well before distributing the profits among the shareholder. Also corporation enjoys several benefits and is an important form of business existing in an economy.

Advantages of Corporation

Some of the advantages of a corporation are as follows:

  • Limited Liability – One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation’s debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.
  • Corporate Tax Treatment – Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C Corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.
  • Attractive Investment – The built-in stock structure of a corporation makes it attractive to investors.
  • Capital Incentive – The stock structure also allows corporations to attract key and talented employees by offering an ownership interest in the form of stock options or stock.
  • Owner/Employee – A business owner who works in his or her own business may become an employee and thus be eligible for reimbursement or deduction of many types of expenses, including health and life insurance.
  • Operational Structure – Corporations have a set management structure. Shareholders are the owners of a corporation, who elect a Board of Directors, which then elect the officers. Other than the election of directors, shareholders do not typically participate in the operations of the corporation. The Board of Directors is responsible for the management of and exercising the rights and responsibilities of a corporation. The Board sets corporate policy and the strategy for the corporation. The Board elects officers; usually a CEO, vice president, treasurer and secretary, to follow the policies set by the Board and manage the corporation on a day-to-day basis. In a small corporation, the lines between the shareholders, Board of Directors, and officers tend to blur because the same people may be serving in all capacities.
  • Perpetual Existence – A corporation continues to exist until the shareholders decide to dissolve it or merge with another business.
  • Freely Transferable Shares – Shares of corporations are generally freely transferable because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. A corporation continues to exist as a separate entity and is not terminated or dissolved even when shareholders dies or sell their shares. Shares of corporations are freely transferable unless shareholders have “buy-sell” agreements limiting when and to whom shares may be sold or transferred. Also, securities laws may restrict the transferability of shares.

Compare with Advantages & Disadvantages of Sole Proprietorship Business.

Disadvantages of Corporation

Following are the major disadvantages associated with a corporation:

  • Fees – It costs money to incorporate. There are typically four types of fees, including: a fee to file the articles of incorporation with the secretary of state; a first year franchise tax prepayment; fees for various governmental filings; and attorney fees. But every year tens of thousands of businesses choose to incorporate online without the use of an attorney.
  • Paperwork – A huge aspect of the corporate formalities that must be followed consists of paperwork. Reports and tax returns must be compiled and filed in a timely fashion; business bank accounts and records must be maintained and kept separate from personal accounts and assets; records must be kept of corporate actions, including meetings of shareholders and Board of Directors; and licenses must be maintained.
  • Disclosure of Names of Corporate Officers and Directors – Most states do not require that names of shareholders be a matter of public record; however, many states require that the names and addresses of corporate officers and directors be listed on one or more documents filed with the Secretary of State
  • Dissolution - Since corporations have a perpetual existence, states provide a mechanism for dissolving a corporation and liquidating its assets. Dissolution does not happen automatically. A corporation can be dissolved voluntarily or involuntarily. A corporation’s officers and directors are charged with responsibility for dissolving the corporation, including gathering corporate assets, paying creditors and outstanding claims, and distributing remaining assets to shareholders.
  • Tax Consequences – C corporations have potential double tax consequences-once when the company makes its profit and a second time when dividends are paid to shareholders. S corporations can mitigate this tax issue.

Thus it can be said that a company or a corporation is a separate legal entity. If the company’s business fails, the personal assets of the shareholder are protected, however the entity is more complex. Companies have a perpetual existence and are complex to administer which is regulated by complex Corporations Law. Establishing a company is a costly affair and can costly to wind up as well.

Some of the well known examples of Corporations are:

1) Reliance Industries Limited – Reliance Industries or RIL as it is known commonly is one of the largest corporations in India. Company has huge shareholder base and immense market capitalization. Mr. Mukesh Ambani, the current richest Indian, is the promoter of the company and Chairman of the board.

 

 

2) Facebook Inc. -Social networking giant Facebook is one of the largest corporations operating in the said segment. Company is listed in the US stock exchange and has Mr. Mark Zuckerberg as the founder and CEO of the company.

PG

Niraj Satnalika

Niraj is an MBA in International Business (Finance). Prior to this he completed B.Tech in Electronics and Instrumentation. He is currently working with Confederation of Indian Industry (CII), Kolkata in capacity of Consultant. Satnalika is actively involved with an NGO and works towards promoting education among the underprivileged.

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