A corporation is a business entity that is legally separate from its owners and possesses most of the rights and responsibilities of an individual. Although the characteristics of business entities established as corporations introduce numerous benefits, these organizations also face various drawbacks.
The first benefit associated with corporations is the aspect of limited liability among the shareholders. In this regard, the shareholders of a corporation do not have any responsibility pertaining to the debts of corporation. However, regulations for corporations allow shareholders to participate in profit sharing through dividends or benefits associated with stocks. Secondly, a corporation possesses the characteristic of continuous existence. Since the law defines a corporation as a distinct business entity, the exit or death of a corporation’s shareholder(s) does not cause the corporation to cease operating (Wild et al., 2007). The ownership of a corporation is transferable, and it can only cease to operate due to dissolution by shareholders or through a merger with another business entity. Another advantage of corporations is that they pay their own tax separately from the owners and thus do not introduce additional deductions on the shareholders’ returns.
Establishing a corporation is a costly process. It entails numerous formal and legal procedures such as filing with the SEC and drafting an affidavit. Moreover, a corporation requires large amounts of initial capital. The other drawback concerns the high levels of regulation associated with corporations. Such regulations include the Securities and Exchange Commission (SEC) regulations and regulations on secondary licenses (Schneeman, 2002). The third disadvantage of corporations is the aspect of double taxation, which results from the taxation on income distribution to shareholders after a corporation, has already paid tax on its income. Another drawback is the complexity associated the dissolution of corporations. In order to dissolve a corporation, the concerned parties must file for dissolution with the SEC and present other requirements such as tax clearance.
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