Question

Discuss the benefits and drawbacks of establishing a corporation.

Answer 1

The benefits of establishing a corporation are as follows:

• Limited liability: The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity protects them from any further liability, so their personal assets are protected.

• Capital: A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

• Ownership transfers: It is not difficult for a shareholder to sell shares in a corporation.

• Perpetual life: There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.

• Profits: If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.

• Certain expenses are tax deductible: Owners can receive tax-free benefits such as deductions for retirement plans and insurance in case of C corporation.

• Credibility: A corporate form of business organization is considered more stable than other forms of business organization.

The disadvantages of a corporation are as follows:

• Double taxation: Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income is taxed twice.

• Corporations lack business confidentiality: As part of the federal rules and regulations, a corporation must provide shareholders with an annual report and various other reports. These reports present data on sales volume, new assets, profits, debts, and many other qualitative as well as quantitative information.

• Excessive tax filings: Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork.

• Complex Process: Setting up a corporation is a very complex process. It takes heavy paperwork to set up a corporate. The owners have to take lots of permissions from different regulatory authorities. Also, many norms of different regulatory bodies that a corporate must fulfill before it can start its business.

• Independent management: If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.

• Conflict of interests:Sometimes, it happens that the Board of Directors and the executives may fulfill their personal interests by taking certain decisions. These decisions may not be good for the health of the corporation.

• Extensive rules to follow

  There are many standards set by law on how the corporations should govern themselves. A small mistake of manipulation by any of the top executives could penalize the corporate heavily. Due to this, the corporate may gain a bad image and its valuation in the stock market may go down. Hence, Sam may get punished for something which was not under his proper control.