Different Types of Corporations: Advantages/ Disadvantages of Corporations

Anyone who operates a business, alone or with others, may incorporate. This is also true for anyone or any group engaged in religious, civil, non-profit or charitable endeavors. You do not have to be a business giant to be able to have the financial and other benefits of operating a corporation. Given the right circumstances, the owner(s) of a business of any size can benefit from incorporating.

General Corporation

This is the most common corporate structure. The corporation is a separate legal entity that is owned by stockholders. A general corporation may have an unlimited number of stockholders that, due to the separate legal nature of the corporation, are protected from the creditors of the business. A stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.

Advantages

• Owners' personal assets are protected from business debt and liability
• Corporations have unlimited life extending beyond the illness or death of the owners
• Tax free benefits such as insurance, travel, and retirement plan deductions
• Transfer of ownership facilitated by sale of stock
• Change of ownership need not affect management
• Easier to raise capital through sale of stocks and bonds

Disadvantages

• More expensive to form than proprietorship or partnerships
• More legal formality
• More state and federal rules and regulations

Advantages

The popularity of corporations is due to following advantages:

1. The liability of the owners towards the creditors is limited to their investment in the company. This means that in case of liquidation of the company, if the company's assets are insufficient to meet the liability, nothing is required to be contributed by the owners. Only the owners' contribution is at stake rather than their personal assets.
2. The corporation is considered a legal person with perpetual existence. It exists until it is liquidated and death or change in ownership has no effect on the corporation.
3. Additional capital can be raised easily through stock markets, etc.
4. The ownership is represented by the number of share certificates held by a person, and this makes the transfer of ownership very easy.

Disadvantages

Following are the disadvantages of a coporation:

1. Establishing a corporation is a complex process and requires registration with the central regulatory authority and listing on a stock exchange which required fulfillment of certain requirements related to the amount of capital, number of directors, etc.
2. Normally the corporations have a large number of shareholders; they delegate the governance function to a body of persons called board of directors. The board of directors hires management to look after the day to day affairs of the corporation. The management is an agent and the owners are principal. It is quite possible that the management may act to further their own interests rather than the interest of the owners of the corporation. When this happens it is called an agency problem.
3. In case of corporations there is double taxation. First of all the corporate income is taxed at a flat rate and then the dividends paid to the shareholders is taxed.