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Corporation Advantages and Disadvantages

A corporation is a legal entity, organized under state laws, whose investors purchase shares of stock as evidence of ownership in it. The advantages of the corporation structure are as follows:

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

  • Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

  • Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.

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

  • Pass through. 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.

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 can be taxed twice.

  • 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. The exception to this scenario is the S corporation, as noted earlier.

  • 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.

A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on a stock exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held.

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