Question

Write a note on the salient features of a corporation explaining the benefits and limitations to the firm and to the investors with this form of business organization.

Answer 1

A corporation is a legal entity on its own and it has most of the rights that an individual usually have. It can hire people, sue companies and individuals, purchase assets and apply for loans. This type of company is separate from its owners and created by a group of people to achieve a common goal. If one wants to start an organization as corporation he need to understand the corporate structure, Double taxation, shares holder’s rights and responsibilities, management requirement etc.

Benefits to the firm:

1. A corporation is a separate operating and legal entity. It operates separately from its owners. Corporate can never be held liable for the dues of ownership and has many of the rights and responsibilities of a person.
2. A corporate will continue to run forever like a river. A death, resignation, termination or voluntary retirement of one shareholder will not impact the operations of the corporation.
3. It is easy for a corporation to raise capital through debt and equity. They can either issue equity shares to the large group of public and issue bonds for a specific maturity period to acquire capital for the business.
4. Sometimes corporation may get different kind of incentives and reliefs from the government to establish or expand their business. As it increases the revenue for their country and generate more employment.

Benefits to the investors:

1. Investors who buy shares of the corporation will become the real of the organization. And every shareholder will have voting rights as per their stake. These shares can be easily transferrable from one person to another.
2. The shareholders of the company does not actively engaged in its management. Instead, they hire professional managers to handle the oversight of the business on their behalf and they are called as Board of directors.
3. An investor will get dividends for his proportionate amount of shares held in the organization out of the profits made by the company.
4. Investors can sell the shares in the market for higher price, Thereby they make good amount of profit.

Limitation to the firm:

1. There are various types of income and other taxes that must be paid depending on the kind of corporation and it will require a substantial amount of paperwork.
2. When the corporation have many investors without any clear majority interest. Then management team of a corporation can operate the business without any real oversight from the owners.
3. The process of forming an organization is very complicated, As it requires to submits different kind of documents like MOM, AOA, prospectus etc. before registration.

Limitations to the investors:

1. There will be no direct involvement by the investors in the management of the corporation. As BOD will monitor the operations of the business.
2. Depending on the type of corporation, it may pay taxes on its income, after which shareholders will also pay taxes on any dividends received. Hence, the income can be taxed twice here.
3. The percentage of the dividend will be decided by the BOD and at the time of liquidation shareholders will be last one for settlement.