Question

posted 1 year ag Keith Weissman Corporate form of ownership What are the key characteristics of a corporation? What are some of the advantages and disadvantages of this form of business organization

Answer 1

The five main characteristics of a corporation are limited liability, shareholder ownership, double taxation, continuing lifespan and, in most cases, professional management.

Corporation Has Limited Liability

A corporation grants the owners limited liability against debts and lawsuits filed against the company. This means that any loans, credit cards, mortgages or revolving credit with vendors, are the sole responsibility of the company. The same is true for any lawsuits or insurance claims against the company.

This is best illustrated when a company goes into financial hardship and files for bankruptcy; payroll, taxes and debts are all paid before any shareholder gets paid from the remaining assets, but the shareholders are not liable to pay for any of these if the assets are not enough to pay everything off. All accounting is done for a corporation under its own unique Tax Identification Number obtained from the IRS.

Corporation is Owned by Shareholders

The corporation is owned by shareholders. When the corporation is formed, a fixed number of company stock shares are issued. Stock shares can be owned by one person or many shareholders. When you think of the public corporations that sell stock on the stock exchanges, there are potentially millions of owners to any given company. Shareholders are allowed to vote based on the number of shares they own; the more shares an owner has the more control he has over the company's decisions.

Consider Double Taxation

For a smaller corporation, double taxation is a significant consideration. The corporation is taxed on earning at the business level. When profits are distributed to shareholders, those are also taxed as dividends. Depending on the overall revenues and how much is distributed to the shareholders, this could have a significant financial impact on the owners. Keep in mind that there are two types of corporate structures, the C corporation and the S- corp. Smaller businesses may elect the S-corp to pass through revenues directly to owners to mitigate the double taxation.

Corporations Have Their Own Lifespan

A corporation is its own entity, meaning it has a lifespan that only ends when the board of directors and owners vote to dissolve the business. This means a corporation extends beyond the lifespan of its human owners. Stock shares are transferable upon death or have the ability to be sold and transferred from person to person. Transfers happen either through a public stock exchange or through private transactions for nonpublic entities.

The transfer of stock is why a large company like Ford Motor Company and many other major corporations still exist today, even though their founders died decades ago.

Corporations Have Professional Management

The owners of a corporation may be able to vote on decisions for the board of directors to make final directives on, but the shareholders are not necessarily the managers of the company. For many small businesses, the majority shareholder is the founder and main leader of the company. However, it is possible for any corporation to hire a company leadership, while also reaping the benefits of the profits. The board of directors votes on major budget items.

The advantages of the corporation structure are as follows:

• Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability, so their personal assets are protected.

• Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

• Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.

• Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.

• Pass through. If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.

The disadvantages of a corporation are as follows:

• Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.

• Excessive tax filings. Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation, as noted earlier.

• Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.