Advantages and Disadvantages of Organizing a Firm as a Corporation

Advantages and Disadvantages of Organizing a Firm as a Corporation

In the ever-evolving world of ours, the business model has always been about increasing profits and shifting innovations. There’s severe competition in the business world and every company or firm strives to be the best among the best. Firms or companies can take different forms according to their jurisdictions. One such form is a corporation. Let us look at the advantages and disadvantages of organizing a firm as a corporation.

WHAT IS A FIRM?

A firm is an enterprise that buys or sells products or services to its consumers intending to make a profit. It is also called a company or business colloquially. The term firm describes the association of several persons who are interested in business. And it does not qualify as a legal entity. In other words, it is only a term used to describe persons who have entered into a partnership with one another. Collectively, they are referred to as a ‘firm’. For instance, limited liability partnerships, corporations, and proprietorship – all come under the bracket of a firm.

WHAT IS A CORPORATION?

Corporation is an authorized group of people or a company that acts as a legal entity and is recognized by law. It is a single organization. The term corporation is derived from the Latin word, “corpus” which means a body of people. Corporations have rights and responsibilities like those of an individual and can be referred to as a legal person. The owners of a corporation are in control of the company. They are known as shareholders who have shares in the profits, ownership, and decision-making of the said corporation. However, these shareholders do not directly run the company. They appoint a Board of Directors (team of people elected to represent the shareholder’s interests) to oversee the affairs of the corporation.

In recent times, the concept of what a corporation has constantly evolved. In the United States, almost 200 CEOs of America’s largest corporations like Accenture, Goldman Sachs Group, Fox Corporation, and Proctor & Gamble Company signed a new Statement of Purpose of a Corporation. The purpose of a corporation goes beyond profits according to the statement. And it aims to create more value for all its stakeholders with greater integrity, quality, and sustainability.

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Advantages and Disadvantages of organizing a firm as a corporation

ADVANTAGES OF ORGANISING A FIRM AS A CORPORATION

Limited Liability

One of the biggest advantages of a corporation is that its shareholders are only liable up to the extent of the capital that they have invested in the company. The corporate protects the owners’ assets and guards them from additional liabilities. In other words, the owner’s assets are protected against business liability or debts. For instance, if a corporation goes bankrupt then the money invested by the shareholders (to purchase their shares) is used to pay off lenders or creditors. It helps in promoting investments and reduces the collective risk of the owners of the said corporation.

Substantial Source of Capital

A firm as a form of a corporation has an added advantage of raising a substantial amount of capital. They can do this through the sale of ownership interests in the form of stocks or shares as an initial public offering (an IPO) at the beginning or they can do it at a later stage. A public-held corporation can raise huge amounts of money by selling shares or through bonds. Additionally, banks that provide loans prefer giving it to an incorporated corporation or business. They also have tax benefits as they file taxes separately from their owners. So, owners of a corporation only pay taxes on profits that are in the form of salaries, bonuses, and dividends.

Perpetuity

Corporations as a form of business has a perpetual existence. This means that they continue to exist even after the deaths of their board of directors, managers and executives. There is no limit to the life span of a corporation. It can only stop functioning if the stakeholders of the corporation decide it. Hence, this is a beneficial model of business as investors of a corporation do not have to worry about the non-functioning of the company.

Transfer of Ownership

There is an easy transfer of ownership in a corporation unless they are restricted by any law that governs it. In a public company, the share of the company can be easily transferred to another owner. But due to restrictions in a private company, it is relatively harder to sell or transfer their share because of confidentiality.

Credible

Another advantage of a corporate model of business is that it builds credibility. It is one of the more stable forms of business. Also, these corporations tend to hire motivated and highly qualified employees because of the benefits it extends to their company members. This results in higher efficiency in the working of the company. Hence, this shows the credibility of the company to its investors, customers, and other stakeholders.

DISADVANTAGES OF ORGANISING A FIRM AS A CORPORATION

Complex

Forming a firm as a corporation is a complex process. It requires a lot of paperwork to set up a company. The owners have to take multiple permissions and have to make sure it is from the right authorities. Each regulatory body has a different procedure that they follow. When the owners set up their company, they must make sure that all the criteria of a corporation are met. Additionally, they also have to file multiple tax filings depending on the type of their business. Therefore, the process can be tedious and complex for the owners.

Lacks Confidentiality

Corporations lack business confidentiality. They have to submit annual reports and other relevant documents to the shareholders. This is a legal requirement that has to be complied with. These reports have every information about the company like their assets, expenses, profits, debts, etc. And these reports and records are open to the general public which can get into the hands of their competitors.

Conflict of Interest

There are possibilities of conflict of interests between various stakeholders of a company like the members of the Board of Directors, executives, and other employees. Some stakeholders might try to further their agendas for their benefit. This can harm the image as well as the smooth functioning of the said corporation.

Advantages and Disadvantages of organizing as firm as a corporation

Extensive Rules and Procedures

Another disadvantage of forming a corporation is that some extensive rules and procedures need to be followed. For instance, they must have a Board of Directors and they have to hold regular meetings with them. Certain records and documents have to get annually published. Also, in case of any faults in their payments, companies can be heavily penalized. This can hamper with the corporation’s market value. Corporations are expensive and time-consuming. The initial capital required to start a company is costly which includes, the startup costs, operations, logistics, as well as tax costs. Hence, they must always be careful to follow all rules diligently.

A firm in the form of a corporation can be a beneficial model for the firm. But it should strive not only for profits but also for innovation and sound economic growth. Above all, it must invest, innovate and grow holistically.

Know More – Advantages and Disadvantages of Partnership

Pros and Cons

PROS

CONS

Limited Liability

Complex

Substantial Source of Capital

Lacks Confidentiality

Perpetuity

Conflict of Interest

Transfer of Ownership

Extensive Rules and Regulations

Credible

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Anchita Nair