Feb. 10, Accounting 202
The Advantages and Disadvantages of Incorporating a Business
In order to mention all the advantages and disadvantages of incorporating a business, first I should try to explain what a corporation is. In 1819, Chief Justice Marshall of the United States Supreme court said: " A corporation is an artificial being, invisible, intangible, and existing only in contemplation of the law." In the Webster's College Dictionary corporation is defined as "an association of individuals, created by law and having an existence apart from that of its members as well as distinct and inherent powers and liabilities." A corporation is divided into many units called shares of stock. The owners of the stock are called stockholders or shareholders. One of the advantages of incorporating a business is that because a corporation has a legal existence, shares can be sold at any time without affecting the operations of the corporation. Also, shares can be bought at any time. Another big advantage of incorporating a business is that corporation have limited liabilities. This means that the corporation is responsible for its own acts and obligations under the law. This characteristic protects the stockholders of the corporation because the only financial loss that they may suffer is limited to the amount invested. Also, the creditors of the corporation can not go beyond the assets of the corporation to satisfy their claims.
The stockholders or the shareholders are the ones who have control over the management of a corporation's operation and activities. They are the ones who elect the board of directors, and the board of directors are responsible to the stockholders. Also, the board of directors are responsible for the management of the day-to-day operation of the corporation. They also decide when and how much of their income to give to the stockholders or shareholders.
Another characteristic that can be an advantage of incorporating a business is that corporations may be organized for nonprofit organizations such as colleges, hospitals, and others humanitarian purposes. However, most of the corporations are organized to earn a profit for stockholders.
The biggest disadvantage of a corporation is that corporations are subject to taxes. Corporations are not like proprietorship and partnership forms of organization, they must pay federal income taxes. Also, stockholders must pay income taxes on any dividends distributed to them. So, all the corporations are being tax twice and it is what is call double taxation.
There are many advantages of incorporating a business. Before any body decide to do that, they should study every case in a particular way and decide if it is worth it to incorporate a business. Most of the biggest business in the world have become corporations because it is easy to control and better way to get new capital.