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Advantages and disadvantages of corporations
Within a free market system, new businesses find easy access to the economy and opportunities to succeed. Nevertheless, the level of competition can be so high that success is very difficult. A partnership is not legal entity separate from its owners; like sole traders, partners have unlimited liability: in the case of bankruptcy, a partner with a personal fortune can lose it all. Consequently, the majority of businesses are limited companies (US - corporations), in which investors are only liable for the amount of capital that have invested. If a limited company goes bankrupt, its; assets do not cover the debts, they remain unpaid (i.e. creditors do not get their money back).
Often one person does not have enough money to start a business. Combining the resources of a number of people and forming a corporation is a way to raise the large amount of money needed. A corporation is a business, that although owned by one or more investors, legally has the rights and duties of an individual. Corporations have the right to buy, sell, and own property. Corporations may make legal contracts, hire and fire workers, set prices, and be sued, fined and taxed. A business must obtain a charter of incorporation from the state legislature to be legally recognized as a corporation.
Corporations have some advantages over sole proprietorships and partnerships. First, a corporation has limited liability. Thus if the corporation goes bankrupt or is sued, the stockholders lose only the value of their stock. The stockholders, who are the corporations owners, cannot be held personally responsible for any money the corporation owes. Second, corporations have the ability to raise very large amounts of money. They use this money to change models, replace obsolete equipment, and build new factories. Corporations can raise money by selling bonds, as well as stocks. Third, a corporation has an unlimited life. That is the corporation continues to function despite death, transfer, or changes in ownership, management, or labor. the work of sole proprietor or partners can end abruptly in such circumstances. This stability attracts small investors. The fourth advantage of corporation is the ease of ownership transfer. Selling a small business may be difficult; selling shares of stock is relatively easy. The investor also has an advantage. The ability to get out of one business, by selling stock, and into another quickly, by buying stock, is quite useful to small investors.
Corporations have disadvantages as well as advantages. First, complex forms must be filed with the state or federal government. A charter must then be issued, investors found, share sold, and manufacturing or sales begun. The procedure for setting up a corporation is more difficult than that for setting up a sole proprietorship or a partnership. Also, to succeed a corporation must pay stockholders regular dividends and must keep detailed records to satisfy appropriate government agencies.
Second, a corporation's profits are subject to double taxation. A corporation must pay taxes on its profits before the profits are distributed to stockholders as dividends. The stockholders include this dividend money as personal income on their income tax forms. Stockholders pay taxes on this income. The government, then, has taxed the corporation's profits twice.
Third in corporations with many owners or stockholders the individual share of profits in the form of dividends is comparatively small. In a single proprietorship or partnership, profits are divided among fewer individual. Therefore, individual incomes are often greater.
Fourth, a corporation's owners do not directly control the business. Most individual stockholders take little interest in management decisions. In contrast, sole proprietors or partners manage their own business. The main concern go the owner-managers is the success of the business. Managers of large corporations, though, may not have invested their own money in the business. Career decisions may be different from, and more important than, decisions to improve the business. For this reason many corporations arrange for management to own shares of stock.
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