This post was most recently updated on December 22nd, 2018
There can be numerous corporations’ advantages and disadvantages, but in our opinion, whether you should incorporate your business or not – is more a matter of where you want to take your business. What are your growth plans? Are you only looking to sustain your existing business?
A firm is said to be a corporation when a group of people create a separate legal business entity. A corporation is a separate legal body by law. It is separate from it’s owners. It coule be publicly owned, as well as privately owned.
But if the business takes the form of a regiatered corporation, it results in protected the owners from any personal liability beyond the business.
Corporations Advantages And Disadvantages
Since entrepreneurs serious about growth, adopt this form of operating their businesses.
Advantages of Corporations
Let’s get into some of the significant corporations’ advantages and disadvantages that may affect businesses.
One of the most significant benefits of corporations is limited liability. This means that if the firm goes bankrupt, the owners only lose their investment in the company and not personal assets.
In the case where a firm is not a corporation, there is no limited liability. With limited debt, there is less risk of investing in the business.
In the case of a proprietorship, if one of the owners dies or withdraws, the partnership is finished. On the other hand, a corporation continues as it is, even if any shareholder dies or retires from the business, thereby making it easier to attract more investors.
Raises Huge Amount Of Capital
Another significant advantage of a corporation is that it can increase a considerable amount of money since it can sell as many shares as it wants to and raise vast amounts of money. Such a case is not possible for sole proprietorship and partnership firms.
Lesser Chances Of Going Bankrupt
There is a very minimal risk of a corporation is going bankrupt. Whenever a corporation would run out of cash or would require more capital, it can quickly issue more shares and get itself out of this critical problem.
Better Relations With The Banks
Corporations enjoy good relationships with the banks as well. Since they have limited liability and they are less risky, banks are willing to give them loans at a low rate as well. In a proprietorship business, banks are often reluctant to give out loans, and even if they do, they have high standards.
Growth Is Easier
A corporation grows at a much faster rate and better way compared to other organisations. Since it does not have an issue with the capital, the Board of directors can expand the firm easily.
Disadvantages of Corporations
Besides the advantages, there are quite a few disadvantages of corporations listed below.
As a corporation is a registered firm, it has to pay a very high amount of tax – around 40% let’s say? Usually, due to high profit and sales, the governments tax them quite heavily on their earnings after paying of all expenses – as compensation from them to operate in their territory.
This is one of the significant drawbacks of a corporation.
A Lot Of Legal Formalities
There are a lot of legal formalities which have to be finished in the start. These are not only expensive, but highly time-consuming. It takes months to get a corporation registered. Other than that, each year AGMs (Annual General Meetings) has to be held as well which are expensive.
No Secrecy Of Accounts
Another drawback with corporations is that there is no secrecy of accounts. Since all the reports are published and made public (not in the case of private corporation), much of the firm’s critical data is visible to competitors.
Conflicts Between Shareholders And Board Of Directors
Another drawback of corporations is the fact that there can be a conflict between the shareholders and Board of Directors.
The shareholders want maximum dividends from profits, but the management wants to reinvest most of the benefits back into the business for further expansion. This can create a significant conflict for many firms.
Risk Of Dilution
Loss of ownership can take place if someone can buy more than 50% of the total shares of the company. Sometimes even a 30-40% stake means that the control is now no longer of the actual owners. This is called the risk of dilution, and it is highly present in Corporations.
Understanding How Corporations Work
Conclusion: Advantages & Disadvantages of Corporations
Finally, we can say that understanding corporations’ advantages and disadvantages gives us a much clearer idea of whether this type of business model is for you or not. Also, whether you would like to start your business with a corporation or a choose a different business model: sole proprietership and partnership.