Advantages And Disadvantages Of Corporations

The corporate form of business is a more flexible instrument for large-scale economic activity than the sole proprietorship or partnership.

First, because the corporation itself has legal standing, it safeguards its owners, relieving them of individual legal responsibility when they act as agents of the business.

Second, the owners of shares of stock have limited liability; they are not responsible for corporate debts. If a shareholder paid $100 for 10 shares of stock and the corporation goes bankrupt, he or she can only lose the $100 invested.

Third, corporate stock is transferable. Thus, the corporation is not damaged by the death or disinterest of a particular person. An owner of stock can sell his or her holdings at any time or pass the stock along to heirs.

Yet the corporate business organization has drawbacks as well as benefits.

One disadvantage relates to taxation. As a separate legal entity, the corporation must pay taxes. Unlike the treatment of interest on bonds, dividends paid to shareholders are not a tax deductible business expense for the corporation. When the corporation passes along profits to individuals in the form of dividends, the individuals are taxed again on these dividends. This is known as "double taxation."

Another cost results from the fact that ownership becomes separated from management. While this makes management easier, some managers are tempted to act more in their own interests than those of the stockholders.