Corporation is a type of business which is formally registered as a public owned company it is recognized as a sperate entity from its owners.
The three main disadvantages of sole proprietorships and partnerships are:
The popularity of corporations is due to following advantages:
- 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.
- 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.
- Additional capital can be raised easily through stock markets, etc.
- The ownership is represented by the number of share certificates held by a person, and this makes the transfer of ownership very easy.
Following are the disadvantages of a coporation:
- 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.
- 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.
- 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.
Written by Obaidullah Jan, ACA, CFA