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May 04, 2022

What are the Advantages and Disadvantages of forming a Corporation?

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The corporation acts as an economic entity, the authorized capital divided into equal shares that give the right to access information and share in profits and are in free circulation. The rules of this appeal are established by law and the corporation’s charter. Corporations include open joint-stock companies, whose shares can be distributed by available subscription among an unlimited number of persons, and closed joint-stock companies, whose shares are circulated in the joint-stock company itself among a predetermined circle of persons.

What is a Corporation?

A corporation is an organization, a group of people or companies, authorized by the government to act as a single entity and recognized by law to a specific goal. It is separate from its owners, has a life of its own, can sue, collect loans, pay taxes, have assets of its own, be indebted, employ people, open office etc. Corporations possess the same rights as natural persons.

They are formed when individuals, called shareholders, decide to participate in the ownership and formation of a corporation through shareholding to achieve a common goal. A corporation may be commercial or non-commercial.

Types of corporations

The size of a company may be small enough to become a corp. There are several types of corporations:

  • Public corporation — a corporation which is owned by the government and created due to particular government purposes.
  • Validate corporation — a public use organization which has a monopoly on the provision of essential services (public utilities that monopoly supply electricity, water, gas, as well as a local telephone network).
  • A private corporation is a company owned by individuals or firms.
  • Non-profit corporation — a company whose owners have limited liability and the primary purpose of the activity is to provide services and not to maximize profits.
  • Commercial corporation — a company whose purpose is to make a profit.
  • Public corporation — a corp which actively distributes shares in open auctions, gives complete control over the management of the corporation.
  • A closed corporation — is a corporation that does not sell shares at public auction but distributes among the founders and gives complete control over the corporation’s management.
  • Professional corporations are not open corporations. Shareholders offer professional services (lawyers, economists, medical workers).
  • Limited liability corporations — an institution that combines the advantages of an S-corporation and a limited liability company (the number of shareholders is not limited, the participation of members in management is not limited, the period of existence is not more than 30 years).

The sharers manage the corporation. With the large size of the company, the participation of all shareholders in management is formal, and the actual control is carried out by institutional investors-organizations that own blocks of shares, banks, funds, and insurance companies. Shareholders elect representatives — members of the Board of Directors by voting, who will determine the corporation’s policy and select competent managers to manage employees. The real power in corporations is held by senior officials who offer sharers a list of Board of Directors.

What are the Advantages and Disadvantages of forming a Corporation?

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Corporation features

Thanks to the unification of subjects interested in each other and their resources, the corporation as a form of organizing joint activities provides the implementation of economic processes and the possibility of preserving and developing the social community.

A corporation can carry out its activities in one area or be diversified when, within a common strategy, a single financial and information flow, a horizontally or vertically integrated set of individual technological processes for the production of goods and services operates.

Why create a corporation?

Forming a corporation provides many benefits not found in other business forms, such as sole proprietorship or partnerships. The benefits outweigh the disadvantages.

Benefits of opening a corporation:

  • Limited liability. Corporations are different from their owners; everything that affects the corporation does not affect the owners. Shareholders can share in the distribution of profits through dividends, but they cannot personally be held against the corporation’s obligations.
  • Eternal existence and continuity. Corporations have an unlimited life span. The presence of a corporation does not depend on the life of its shareholders. Even if the original owners pass away or decide to sell their shares, this will not threaten the continued existence of the corporation.
  • Management. Shareholders can vote and elect a board of directors to oversee the operation and management of the corporation’s day-to-day operations. In a corporation, various departments are formed to manage multiple functions, which creates a structured and organized organization.
  • Legal actions. Corporations have the right to bring claims on their behalf without the participation of the owners. Claims cannot be filed against its shareholders in the event of disputes between a legal entity and other individuals or other companies.
  • Pension plan. A corp can easily set up retirement plans and savings to provide good retirement benefits for administration and employees.
  • Increases authority and prestige. Starting a business can quickly build a credible reputation and good name among suppliers, customers, banks, employees, government, etc. Also, a corporation name sounds more attractive than a sole trader or partnership name.

Last but not least, there is a tax advantage. Corporations enjoy tax benefits such as deducting health insurance premiums paid to owners or employees, savings on self-employment taxes, workers’ compensation, health insurance taxes, and corporate profits are not subject to social security.

What problems arise when creating a corporation?

Anything with an advantage is sure to have a disadvantage, even the smallest one. The following are the problems associated with creating a corporation:

  • The difficulty of registration. Registration of a corporation’s charter is associated with bureaucratic procedures and costs for legal attorney services.
  • Possibility of abuse. From a societal point of view, the corporate form of business has room for some form of abuse. Since the corporation is a legal entity, some unscrupulous business owners sometimes avoid personal liability for questionable business transactions due to the opportunities the corporate form of business organization opens up for them.
  • Reporting. The paperwork involved in forming a corporation is only the beginning. Tax laws require corporations to verify the legitimacy of all their expenses and deductions from taxable amounts. In this regard, the corporation is forced to process many different documents.
  • Double taxation. The portion of corporate income paid out as dividends to shareholders is taxed twice as a portion of corporate profits and second as a portion of the shareholder’s income.
  • Dimensions. Scale can be one of the advantages of corporations but also a disadvantage. Large corporations sometimes become too inflexible and bureaucratic, making it impossible to respond to market changes quickly.
  • Separation of ownership and management functions. In sole proprietorships and partnerships, the owners of tangible and financial assets themselves directly manage and control these assets. But in large corporations, whose ownership is widely dispersed among tens and even hundreds of thousands of shareholders, there is a separation of ownership and control.

The corporation, or joint-stock company, is the most important form of organization of commercial enterprises, based on their share in production and revenue in the economy of developed countries. The corporation is the most complex organizational structure and mechanism for coordinating economic activities within the enterprise. The corporation and its organizational structure are multifaceted from an economic point of view.

Thus, each organizational form of entrepreneurial activity (sole proprietorship, society, corporation) has financial and economic advantages and social attractiveness, disadvantages, and problems. The best form of ownership of an entrepreneurial structure depends on the purpose of the founder of the business.

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Author: Charles Lutwidge

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