What are the advantages and disadvantages of forming a corporation?

February 7, 2009 by  
Filed under Business Startup, Incorporation

corporation2The world’s largest companies are formed as corporations. Microsoft, Google and Yahoo are all corporations. These companies are worth billions of dollars and they are what you will always see and hear on a business or stock trading news. Unlike a sole proprietorship or a partnership, a corporation is a business that is recognized by law as a separate legal entity with its own powers, responsibilities, and obligations. The defining feature of a corporation is its legal independence from the people who create it. If a corporation becomes insolvent, its owners and shareholders will not be liable beyond their equity investments in the corporation – creditors cannot go after the stockholders’ personal assets to exhaust their debts. This attribute is called limited liability. A corporation sounds very promising, but before sole proprietors and partners decide to incorporate their businesses, we should first study the following advantages and disadvantages of a corporation.

Advantages

Limited liability for the owners. Since a corporation is a separate and distinct legal entity, owners of a corporation are only indebted to the extent of their interest in the corporation. This means that the creditors of a corporation can only run after the assets of the corporation and not the personal assets of the stockholders in the settlement of the corporation’s debts and obligations. In other words stockholders enjoy a “shield” from most creditors.

Ease on the sell and transfer. If the stock of a corporation is publicly traded, owners and investors can sell their ownership interest in a corporation in a matter of minutes through a stockbroker. If the stock is not publicly traded, the stock certificate can be transferred or assigned to another owner by executing a deed of assignment of shares of stock.

Continuity. The corporation’s power of succession enables it to enjoy a continuous existence. Unlike a sole proprietorship, the death of a stockholder will not terminate the corporation. The corporation will continue as a separate and distinct legal entity and the shares of its interest can be transferred from one owner to another owner.

Ease in raising money. Because of limited liability, ease of transfer of shares and continuity, investors are more attracted to investing in corporations rather than in sole proprietorships and partnerships. This attraction allows corporations to raise the capital needed to manage and expand their operations.

Disadvantages

Complexity in organization and regulation. To incorporate a business, an application with the Securities and Exchange Commission must be filed and approved. A higher capital requirement is also sometimes required for other type of corporations. Once approved, the corporation must comply with the numbers of regulations and reportorial requirements which are specifically implemented for corporations.

Double taxation. A possibility of “double taxation may arise on the dividends it pays. The corporation is taxed on its income. Then, if the corporation distributes some of the net income to the stockholders as a dividend, the dividend will be taxed again on the stockholders’ personal income tax returns.

Limited liability may weaken credit capacity. A corporation which doesn’t have a good financial condition and performance may drive away creditors specially that owners are enjoying limited liabilities. This may weaken the corporation’s capacity to borrow money to expand its operations.

Centralized management. Its centralized management restricts a more active participation by stockholders who are not major owners in the conduct of corporate affairs.

By reading this article I hope you come out with a good decision to incorporate or not to incorporate your business. You can examine if your business condition, performance, liquidity and solvency are already enough for your business to face the corporate world.

Comments

4 Responses to “What are the advantages and disadvantages of forming a corporation?”
  1. hizlindir says:

    thank for your sharing

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