Question

E13-19 Identifying advantages and disadvantages of a corporation

Learning Objective 1

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

a. Ownership and management are separated.

b. Entity has continuous life.

c. Transfer of ownership is easy.

d. Stockholders’ liability is limited.

e. Exposure to double taxation is evident.

f. Entity can raise more money than a partnership or sole proprietorship.

g. Government regulation is expensive.

Answer 1

(a) Ownership and management are separated is a disadvantage of corporation. Due to this separation, owners' interference in the operations is very limited or no interference. Management is independent.

(b) Continuous life of the entity is an advantage of the corporation. There is no limit on the life. It can continue to many generations of investors.

(c) Transferability of ownership is an advantage of corporate form of business. Any shareholder can transfer its ownership interest / shares without difficulty.

(d) Stockholder's liability is limited in the corporation. This is the advantage of corporation. Shareholders are liable for upto the amount of their investments. So, their personal assets are protected.

(e) Double taxation is a disadvantage of the corporation. Corporation pays tax on its income and stockholders also are subject to tax after they receive dividends. So, it results in double taxation of the same income.

(f) Raising more money is an advantage of the corporation. Because of its large number of stockholders, its money raising power is not limited to any single or a few partners or persons. Corporation can raise huge amounts of money by issuing stocks.

(g) Government regulation is expensive. It is the disadvantage of the corporation. Corporation has to comply with numerous regulations and has to pay various types of income and other taxes. It results in excessive cost.