In order to have an accurate discussion on the advantages and disadvantages of a corporation, we must first define a corporation and examine its history briefly. The word corporation is actually taken from the Latin term corpus. Corpus means “a body of individuals”.
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In the era of mercantilism in Europe, many European nations chartered corporations to start colonial quests. The predecessors of the corporation as we know today can be found within these chartered firms.
The main predecessor to the corporation was the English East India Company. Established in 1600, the company’s success demonstrated the potentially lucrative potential of the corporation.
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In this piece, we will examine corporation advantages and disadvantages. There are many factors involved, especially with corporation tax advantages and disadvantages.
What is a corporation?
A corporation is a company or group of individuals that have been given the legal authority to act as an entity.This entity is separate from its owners. Corporations are owned by stockholders. These shareholders share in the firm’s profits and losses that are generated by the operations performed by the firm.
How does it differ from a sole proprietorship / partnership?
There are significant differences between corporations and sole proprietorships.
While a corporation is a legal entity, a sole proprietorship is not. A sole proprietorship involves a person who is the full-time owner of the business. On the other hand, corporations can have multiple shareholders that share the ownership duties of the entity. While sole proprietors assume all of the liability for their business, corporate shareholders assume limited liability. As a result, the liability is shared amongst the shareholders of the corporation.
Finally, the corporation can have a legal and separate existence from ownership. On the other hand, a sole proprietorship does not operate separately from its owner. The sole proprietorship and its owner are always tied together. Which means if the business is going under, the sole owner would be responsible for paying all their debt out of pocket.
The differences between corporations and partnerships are significant as well. While corporate ownership consist of many corporate shareholders, the partnership involves ownership shared by two or more individuals. A law firm is the bet example of a business running as partnership. Corporations offer limited liability to its shareholders, yet all of the risk and liability is shared amongst the partners within a partnership.
If sole proprietorship or partnership grows substantially, they can choose to become a corporation by issuing an IPO in order to “go public”
What is an IPO?
Advantages of a corporation
Now, it is time to shift our focus to the specific advantages of a corporation. As we have gone over, the biggest advantage that a corporation has is the concept of limited shareholder liability. Shareholders do not have to worry about being liable for corporate debt.
While sole proprietorships and partnerships have to concern themselves with creditors, corporate shareholders do not.
Given that a corporation operates as its own entity, a corporation has the advantage of living on beyond after the lifespan of its owners. A corporation’s existence is perpetual.
The advantage of a corporation can be seen in how capital is raised with greater ease than other forms of business. Corporations have the advantage of issuing stock in order to increase capital. By taking on more investors in this scenario, corporation’s have greater room for growth.
Corporations offer many tax advantages. Losses incurred by corporations are completely deductible. Depending on the corporation type, corporate profits may not be subject to self-employment taxes. Corporations could potentially achieve tax advantage due to the fact that corporate profits could be left in the firm for further business expansion.
Finally, corporations allow individuals to reduce their tax burdens by leasing their own assets. This is one of the biggest corporation business advantages. When one leases their assets to a firm, the corporation pays a rental fee and the individual collects income on the rental.
Disadvantages of a corporation
Depending on the corporation type, corporations may be subject to double taxation. Given that corporations are separate legal entities, corporations pay taxes on their profits. Yet, corporations must also pay income taxes on the dividend payments that they receive from corporations.
Additionally, we must discuss the disadvantages of forming a corporation. A corporation is more costly to set up than other business entities. Many filing fees are with forming a corporation. Corporations also have to maintain a greater amount of documentation. Records such as annual reports, shareholder meetings and board of director meetings must be documented.
Making Your Decision
To pick the most appropriate form of business, one must examine all the costs and benefits. As previously discussed, corporations has its pros and cons. One must weigh the potential benefits of limited liability and the ease of raising capital versus the potential costs of forming a corporation and the significant amount of documentation that is involved.