When you decide to start your own business, it can be pretty daunting to zero in on what it should look and function like. This article will specifically deal with what a corporation is as well as its pros and cons. So let us have a look.
WHAT IS IT?
In dictionary terms, a corporation is an association or a body formed and authorized by law to act as a single person although constituted by one or more persons and legally endowed with various rights and duties including the capacity of succession. In simple terms, it is a type of business organization that is separate and distinct from its owners. And it differs from other types of business organizations like, for instance, a partnership or a sole proprietorship in its characteristics.
Depending on these characteristics, corporations can be of different types, especially in different jurisdictions. For example, they can be a for-profit organization or a not-for-profit organization. Or on the basis of the number of owners, it could be an aggregate corporation or a sole corporation. These are just a few examples of their classifications depending on their said characteristics.
The most well-known and successful businesses out there are corporations. For instance, Microsoft, Apple Inc., American Express, Heineken, IBM, Novartis, etc. are all examples of corporations.
ADVANTAGES OF A CORPORATION
A major advantage, especially, for the owners of the corporation is that they have some protection. What this means is that when a company gets incorporated, the owners have limited legal liability vis-a-vis the company. More specifically, the corporation’s activities and debts. The corporation, once incorporated, becomes another legal entity and in many jurisdictions is seen as a legal person. Therefore, the owners have certain protections from the corporation’s legal liabilities.
They have the added advantage of securing capital in comparison to other types of business organizations. This is achieved in the form of selling stocks or issuing bonds. Stocks or capital stocks of a corporation are the shares of the company where the ownership is divided. Bonds are debt instruments or fixed income securities, sort of like a loan made to large organizations. Companies or corporations use it to finance their projects and operations.
Another feature of a corporation is that they have the ability to issue stocks. This helps in giving structure to how much stake every owner or shareholder has in the company or business. The capital from these shares can also help run as well as grow the company and its operations. Additionally, it is also a great way for employees to buy the stocks of the said corporation. This way they have the opportunity to have a stake in the company that they work for and reap some of the profits.
The ability to issue stocks is a great way to attract investors for the benefit of the corporation. Ultimately, the company or business generates more interest. As a result, there is more capital and cash flow.
Because a corporation has its own legal identity, it has several owners. There are shareholders, stakeholders, members of the company, directors, etc. who own the said corporation. So even in the event of one owner’s death or inability to perform their task, the functionality of the corporation is not hindered. In other words, corporations have a perpetual or unlimited life.
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DISADVANTAGES OF A CORPORATION
A glaring disadvantage of forming a corporation is that they have tax liabilities. The corporations as a whole get taxed for the profits that are earned. Apart from that individual stakeholders also get taxed for the profits they earn individually. So this is sort of like getting double-taxed for the same exact thing which is unfair to the corporations.
In comparison to other forms of business organizations, corporations are more difficult to incorporate or form. Since it has its own legal identity, there are additional procedures that have to be followed. These include publishing company data like annual reports. This is mostly to keep the creditors and stakeholders of the corporation happy and satisfied.
Corporations are difficult to manage. It is not only a complicated procedure to incorporate a business, but it also requires time, effort, and a lot of resources. The extensive procedure requires several documentations. For instance, the incorporation fees, lawyers’ fees, fees towards the business filing agency, and other initial expenses are unavoidable.
As discussed above, taking the decision of having your business organization into a corporation is a complicated and tedious task. It requires the business to follow a number of corporate formalities. These include filing articles of incorporation, maintaining a corporate record book, board meetings, corporations’ bylaws, etc. These are mandatory so that the company or business actually functions as an actual corporation.
Rules and Regulations
Corporations have to function in accordance to the rules and regulations of their jurisdiction. They must follow federal, state, as well as local laws and regulations diligently. Now, this is a drawback because it takes up revenue and comes in the way of profits of the corporation.
To sum up, weighing the advantages and disadvantages of corporations shows us that choosing the right type of business organization is of utmost importance for the company’s future. Therefore, one should do their research and preferably consult a lawyer before making a final decision.
Pros and Cons of a Corporation