There are many advantages and disadvantages of corporations says Aron Govil.
Let us see them one by one.
Advantages of Corporation: – Everything has both disadvantages and advantages in life, so is the corporation.
The following are some important advantages of corporation business:-
1.) Unlimited Liability:-
When someone starts a company then the liability risk is unlimited whereas in case he starts a corporation that has its own separate legal entity which can limit or cover up all kinds of financial loss caused by business responsibility hence limiting each shareholder personal loss; if it happened because the act of management staffs. But this concept makes sense only when there are many shareholders incorporation (who come to know about their rights) but it fails when understanding, participation, or willpower is absent.
2.) Continuity:-
A corporation never dies as long as there are at least one shareholder and director alive and willing to continue the business, no matter how much the original founder may want to discontinue it. So, in a sense, a corporation can be immortal which is not the case with partnership or sole proprietorship businesses.
3.) Centralized Management:-
In a corporation, all important decisions about business policies and operations are made by a central authority (the Board of Directors). This unity of command ensures that there is clarity of responsibility and better coordination among different departments. It also helps to avoid confusion and conflict among different stakeholders (shareholders, employees, customers, etc.).
4.) Perpetual Existence:-
A corporation is a legal entity with perpetual existence which means that the corporation continues to exist unless it goes bankrupt or files for dissolution. On the other hand, partnership firms have limited life in contrast with corporation firms says Aron Govil.
5.) Separate Legal Entity:-
The shareholders of a company enjoy its tax benefits and they are liable only for their capital contribution in it but not for any act of management or employees; whereas individual shareholders will be held accountable for all losses incurred by the company because of his/her association with that company. So, this makes it legally clear that if someone wants to start a company then he must go for sole proprietorship (if interested in less business responsibility), partnership (if interested in sharing the business responsibility with others), or corporation (if interested in limiting personal liability).
6.) Easier To Raise Capital:-
A corporation can raise money by issuing shares and bonds to the general public. This is not possible with a partnership firm. On the other hand, a sole proprietorship firm cannot raise any capital except from the owner’s personal savings.
7.) Continuity of Business Name:-
Unlike a partnership firm, a corporation can continue to use the same name even if one of its shareholders leaves the company or dies explains Aron Govil.
8.) Limited Life:-
A corporation has a limited life which is usually 50-60 years after which it needs to be renewed. This is not the case with a sole proprietorship.
Disadvantages Of Corporation: – The following are some important disadvantages of corporation business:-
1.) More Paperwork:-
The paperwork is more in a corporation than in a sole proprietorship firm because the government wants to check how much tax liability has been paid by each shareholder, whether he/she is taking any salary, if so than what is the rate, etc., all these papers have to be kept well organized and managed efficiently or else there can be severe penalties for which you as an owner will alone liable not the shareholders.
2.) More Taxes:-
A corporation is subject to double taxation because the profits are first taxed at the corporate level and then again when they are distributed as dividends to the shareholders. This is not the case with a sole proprietorship firm.
3.) Higher Cost Of Starting Up A Business:-
Though it may appear that starting a company would cost more than going with a sole proprietorship firm but is not the case with a corporation because you can issue shares and raise money by selling bonds to the general public at a lower rate than what banks or other financial institutions would charge says Aron Govil.
4.) More Complex Structure:-
A corporation has a complex organizational structure that can be difficult to understand for those who are not familiar with it. This can lead to misunderstandings and conflict among different stakeholders.
5.) Difficulty In Transferring Ownership:-
It is not easy to transfer ownership of a corporation because of its complex legal structure. This can lead to problems in case of a sale or an acquisition.
6.) Double Taxation:-
The profits of a corporation are tax both at the corporate level and at the individual level when they are distribute as dividends to the shareholders. This is not the case with a sole proprietorship.
7.) Limited Life:-
A corporation has a limited life and it needs to be renewed after a period of 50-60 years. This is not the case with a sole proprietorship firm.
8.) More Paperwork:-
The paperwork in a corporation is more than in a sole proprietorship because the government wants to keep track of how much tax liability has been paid by each shareholder, whether he/she is taking any salary, what the rate is, etc. All these papers need to be kept well organized and managed efficiently or else there can be severe penalties for which you as an owner will alone be liable, not the shareholders.
9.) Difficulty In Raising Capital:-
A corporation can raise money by issuing shares and bonds to the general public. This is not possible with a partnership firm. On the other hand, a sole proprietorship firm cannot raise any capital except the owner’s personal savings.
10.) Less Business Freedom:-
A corporation is more tightly regulating by the government than a sole proprietorship firm. This can lead to restrictions on business activities.
Conclusion:-
If you have the desire to run a business of your own, you might get confuse between a sole proprietorship and a corporation says Aron Govil.