Question

Rachel Hipp is the owner of a successful printing shop. Recently, her business has been increasing and Rachel has been thinking about changing the organization of her business from a proprietorship to a corporation.

Discuss some of the advantages that Rachel would enjoy if she were to incorporate her business.

Are there any drawbacks? Explain.

Answer 1

Advantages of corporation

1. Easy access to the funds required for expansion. For a corporation it is easier to raise a debt when compared to other types of structures. The inherent advantage for a corporation is its ability to raise funds through equity and other types of shares and debentures.
2. Limited liability: In corporation the liability of the owner is limited to the share amount. This shields the owners from personal liability when compared to other structures of businesses.
3. Income tax rules for corporations allow various expenses to be deducted before arriving at taxable income. The interest paid on debt will also be deducted before arriving at taxable income which results in less taxes when compared to higher personal taxes in other forms of business structures.

Disadvantages

1. More regulations and high statutory compliance make corporation style of business problematic to run.
2. Dilution in management if the share are issued to investors or public.
3. The shareholders end up paying double the taxes as tax on income is changed once for the company and again for the shareholders when returns are distributed.

Even though there are some disadvantages, the corporation is the best business structure for a good business willing to expand. The advantages overweigh the disadvantages by a far margin.