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There are various business structures around the world. The most basic types are sole proprietorships and partnerships. However, these come with a limited number of owners and capital. Due to these restrictions, some businesses may take the form of corporations. Corporations fix some problems with basic business structures. However, they may also come with some other limitations.
What are Corporations?
Corporations are one of the most advanced business structures. These represent separate legal entities from their owners. Similarly, corporations can theoretically have unlimited owners, known as shareholders. Unlike other business structures, shareholders can transfer their ownership by selling and buying stocks. However, the corporation’s activities don’t get affected by the transfers of ownership.
Corporations often have to abide by several regulations, such as stock market regulations. These regulations exist to keep both the corporation and its investors safe. In most countries, corporations can also take several forms, for example, C Corporations or S Corporations. Each structure can have its advantages and disadvantages.
What are the advantages of Corporations?
Corporations have various advantages compared to other business structures. These include the following.
One of the most prominent advantages of corporations is that it limits the liability of owners or shareholders. Since corporations are separate legal entities, owners don’t have to suffer from their corporation’s liabilities. It means that the personal assets of the owners are safe from obligations. The same is does not apply to other business structures.
As mentioned, corporations can have unlimited owners in theory. Therefore, they can also get endless capital theoretically. There are some restrictions to the capital that corporations raise. However, corporations don’t have to suffer due to limited capital as with other structures.
With sole proprietorships, the business only exists until the owner is alive. Similarly, partnerships can have a limited existence until a partner leaves or joins. However, corporations have perpetual existence. These businesses don’t get affected when shareholders buy or sell their stock. Therefore, corporations have a longer lifetime than other business structures.
As mentioned, shareholders can buy and sell a corporation’s stocks at any time. Therefore, the process of ownership transfer is more straightforward compared to other business structures. Shareholders can also get control of a corporation by owning more than 50% of the stock.
What are the disadvantages of Corporations?
Despite the advantages, corporations can have many disadvantages as well. These include the following.
Corporations separate shareholders from the management. It can create various agency problems between both parties. When a company’s management starts to act in their own interest, agency problems can arise. For other structures, similar issues may not exist. However, with corporations, agency problems are always an issue.
Corporations have various regulations to which they must comply. It creates an administrative burden for the corporation and its management. Similarly, it results in more paperwork and, sometimes, the regulations may be considered excessive. Setting up corporations also requires going through a complex process.
Shareholders in corporations have to suffer due to double taxation. First, the corporation has to pay taxes on its earnings. When it distributes its profits to shareholders through dividends, shareholders have to pay tax on it again. Similarly, they have to pay tax on capital gains when disposing of their shares. It can be a disadvantage for many shareholders.
Corporations are separate legal entities that can have unlimited owners. Shareholders can sell and purchase a corporation’s stocks at any time and gain ownership. Being complex structures and separate entities, corporations can have many advantages. However, they can also come with certain disadvantages.
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