Question

1.     What Is the most important difference between a corporation and all other organizational forms?

2.     What does the phrase limited liability mean in a corporate context?

3.     What are the main advantages and disadvantages of organizing a firm as a corporation?

4.     Explain the difference between an S and a C corporation.

5.     What is the difference between a public and a private corporation?

6.     What is the difference between a primary and a secondary market?

Answer 1

Answer 1)

The most important difference between the corporation and other organizational forms like partnership and sole proprietorship is in terms of liability. The corporation has a limited liability whereas the other forms has unlimited liability.

In case of corporation the ownership rights and not in the hands of a single person or owner. If there is loss or bankruptcy the shareholders does not lose their personal properties to clear debt, whereas the other forms or organization the personal properties are attached and sold to clear the debt.

Answer 2)

The liability in terms of corporate context means that the owners are only liable to the investment that they have made in the firm. In case of loss the shareholders are not required to clear of the debt that has been incurred by the firm.

Answer 3)

The advantages of corporation are

1) The transfer of ownership is easier because the shareholders can easily sell or transfer their ownership to others.
2) The liability is limited to the the investment made in the firm by the owner. There is no fear of loosing their properties in case of loss or bankruptcy.
3) The corporation will run forever since the ownership will continue through many generations of investors

The disadvantages of corporation are

1) The primary disadvantage is that the corporation is subjected to double taxation as the corporation pays taxes and the shareholders who received dividends have to pay taxes.
2) The larger the number of investors the higher the chances that the management becomes independent in terms of decision making without insights of owners.

Answer 4)

The differences between an S and a C corporation are
1) The S corporation has pass through taxes and the C corporation has double taxation
2) The S corporation can be established only if it is already a C corporation whereas the C corporation can be formed by registering within a state.
3) The limit of shareholders is 100 in case of S corporation whereas the C corporation can have unlimited shareholders.
4) The gains and losses are in Form 1120S for S corporation and Form 1120 in C corporation.
5) The owners are paid in salary and other distributions in S corporation and in case of C corporation the owners receive only salary.

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