Chapter 6:

The corporation

A corporation is a business that is licensed by a state or the federal government. The license – or charter- as it is called – divides the business into many parts or shares. Ownership of each of the shares is represented by stock certificates, or, as they are more commonly called, shares of stocks. The people who own these shares of stocks are known as stockholders.

Advantages of Corporation: Corporations have advantages over the sole proprietorship and the partnership forms of business. The 3 most important advantages are limited liability, unlimited life, and easy transfer of ownership.

1.       Limited Liability

There is no limit to the amount of money you might lose as a proprietor or partner. When and if the business is to shut down, every partner in a partnership is to be held responsible to pay for all the company’s debts.

But such is not the case with a corporation. This is because a corporation, in the eyes of the law, has the life of its own. This phrase means that, if the corporation owes money to someone, only the business is responsible for the debt, not the people who own it.

2.       Unlimited Life

The life of a proprietorship and a partnership is limited. The law requires that these businesses must be brought to an end upon the death or retirement of any of their owners. When this happens, a proprietorship and partnership, if they are to continue, must go through a complicated legal process in which new owners are substituted for the old ones. A corporation does not have this problem. When stockholders die, their shares simply become part of their estates and are passed to their heirs. For that reason, corporation can (in theory at least) live forever.

3.       Easy transfer of Ownership

Selling a proprietorship and partnership can be a very complicated and expensive process. The sale requires the services of lawyers and accountants. However, shares of stock in corporation can be sold merely by signing them over to a new owner.

Disadvantages of Corporations: Inspire of its advantages, corporations have its own disadvantages not confronted by proprietorships or partnerships. Corporations are costly and complicated to set up, and their owners are subject to double taxation.

1.       Costly and complicated to set up

The reason why there are so many more proprietorships and partnerships than corporations is that proprietorships and partnerships are easier and less costly to set up. In order to organize as a corporation, a firm must first get permission from the state or federal government. This is a complicated and costly procedure that usually requires the assistance of a lawyer.

2.       Double taxation

The advantage of the corporation results from the fact that the corporation is considered to have a life of its own. In the eyes of the law, the corporation is separate and apart from the people who own it. But out of this status also come a serious disadvantage of the corporation: double taxation.

The profits of most corporations are subject to corporate income taxes. These taxes are levied by the government (They are not levied on proprietorships and partnerships). After the corporate tax is paid, part or all of what remains out of a corporation’s profits may be distributed (paid out) to the stockholders. These profits, or dividends, as they are called, are then subject to the personal income taxes. Thus, the stockholders are said to be subject to “double taxation”: first when the corporation’s profits are taxed, and second when the stockholders’ dividends are taxed at income tax time.