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Advantages and Disadvantages of the Corporate Form of Business

Advantages and Disadvantages of the Corporate Form of Business :

” When you start a business, one of the first decisions is to decide what form is your business going to take. Will it be a corporation, an LLC, or will you operate as a sole proprietorship? The answer depends on your situation, preferences and expectations about the future growth of the business ” .

“Corporations come in two forms, and each has distinct advantages and disadvantages “

Advantages of Corporations :

1) Limited Liability : The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them.

2) Perpetual Existence : Deaths , insanity , insolvency of shareholders or directors do not affect the company’s existence. A company has a separate legal entity with perpetual succession .

3) Expansion Potential : As there is no limit to the maximum number of shareholders in a public limited company , expansion of business is easy by issuing new shares and debentures. Companies normally use their reserves for expansion purposes .

4) Transfer-ability of Shares : If the shareholders of a company are displeased with the progress of the business , they can sell their shares any time. During all this change of ownership , the business continues to operate .

5) Diffusion of Risk : As the membership is very large , the whole business risk is divided among the several members of the company . This is an advantage particularly for small investors .

6) Owners have limited liability :The owners’ assets are protected from the debts and liabilities of the corporation. Shareholders are not held liable for business losses.

7) Easier to raise capital : It is easier to attract capital with the sale of stocks and bonds. A corporation can have an unlimited number of investors.

8) Easy to transfer ownership : Shares of stock can be sold.

9) Certain expenses are tax deductible : Owners can receive tax-free benefits such as deductions for retirement plans and insurance.

10) Source of capital : A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

Disadvantages of  Corporations :

 

1) Lack of Secrecy :  As per the legal provisions, a company has to make various statements available to the Registrar of the Companies, Financial Institutions; the secrecy of business comes down. It is further reduced when the company provides its annual report to the shareholders as the competitors do also find out the details of all financial data.

2) Restrictions : Compared to proprietorship and partnership, a company has to comply with more legal requirements. It consumes considerable time and effort.

3) Management Mischief : Sometimes the managers and directors misuse the company resources for their personal benefits. This brings losses to the company and company is closed.

4) Lack of Personal Interest : Unlike proprietorship and partnership, the day-to-day affairs of a company are looked after by salaried managers. Since they are the employees not the owners, they do have hardly any personal interest and commitment in the company. This may result in inefficiency and in turn losses.

5) Double taxation of corporation profits : The corporation pays federal and state taxes on its profits. When dividends are paid to shareholders, they are treated as income and taxed again.

 

6) More state and federal regulations and oversight : Tax filings are more complicated for corporations. States require the filing of Articles of Incorporation, corporate bylaws and annual reports. Corporations must designate a board of directors and hold annual meetings.

7) Expensive : The incorporation of a company itself is an expensive affair. This is due to the company formalities. Besides, the company has to follow several formalities in every year in complying with these formalities, the company has to incur heavy expenditure which may grab a sizable portion of the profit.

8) Separation of Ownership from Control : Separation of ownership from control, though constitutes a distinct feature of the company form of organization, is itself a handicap. Many companies are run by the directors only for their own benefits and their activities are focused only towards their interest ignoring the interests of the shareholders. They involve in speculative dealings and thereby conceal the actual happenings inside the company. The reports furnished by them to the shareholders also do not represent a true and fair view of the company. Hence, the shareholders are kept in complete darkness.

9) Rigid Government Control : Due to the maladministration of a number of companies by fraudulent directors, the Government has introduced many rigid provisions in the Companies Act so as to exercise rigid control over the affairs of the companies. These provisions, though aimed to safeguard the interest of the shareholders, have become a check while conducting even the routine affairs. Quick decisions have become impossible. All these, in effect, make most of the managements inefficient and ineffective.

10) Erosion of Limited Liability : It is already stated that the limited liability of the members is a distinct feature of company business. But in recent years, both in India and England, company legislation has been directed towards curtailing this privilege of limited liability in certain cases, and the Court can impose unlimited liability on the shareholders, directors or any other person. In other words, the Courts are empowered to lift the corporate veil and impose unlimited liability on the directors and shareholders.

 

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