Thursday, April 26, 2012

Essay on Corporations

Essay on Corporations

This paper will discuss the characteristics of a corporation and the advantages and disadvantages to the corporate form of doing business.

Starting with a definition, a corporation is ‘an organization formed with state governmental approval to act as an artificial person to carry on business (or other activities), which can sue or be sued, and (unless it is non-profit) can issue shares of stock to raise funds with which to start a business or increase its capital’ (TheFreeDictionary, 2008).

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Corporations are often referred to as ‘legal persons.’ Indeed, the analogy with a person is helpful in understanding the functioning of a corporation, since it ‘can enter into contracts, sue and be sued, pay taxes separately from its owners, and do the other things necessary to conduct business’ (Harroch, 2006b, para. 1).

The main advantage of a corporation (which naturally stems from its legal identity being separated from that of an incorporator or shareholder) is that its liability for damages or debts is limited to its assets, thus shareholders and employees are shielded from personal claims, unless their behavior related to the governance of the corporation is illegal.

With regard to functioning of such a legal entity, shareholders of a corporation elect a board of directors. The board can pass bylaws and appoint executive officers and upper management. Registering a corporation in a certain country (referred to as ‘incorporating’) requires submitting Articles of Incorporation to the Secretary of State and informing the latter of the incorporator’s identity, the corporation’s purpose, and the amount of stock it will be authorized to issue. Shareholders and the board are mandated to hold annual meetings (TheFreeDictionary, 2008).

While limited liability is the main advantage of the corporate form of doing business, there are other benefits, such as corporate tax treatment, attractiveness for investors, a possibility of share ownership by employees (which increases their commitment and allows recruiting talented workers), corporate benefit plans, deductibility of health insurance for employees, and transferability of shares.

However, there are certain disadvantages of this form of doing business. Forming a corporation entail paying fees, such as a fee for filing Articles of Incorporation and a first-year franchise tax prepayment. Also, a corporation has to comply with a number of formalities to prevent its status from being revoked. Dissolving a corporation is the responsibility of its board, and this process might entail ‘gathering corporate assets, paying creditors and outstanding claims, and distributing the remaining assets to shareholders’ (Harroch, 2006b, ‘Dissolution’). Dissolution can be both voluntary and involuntary.

The main disadvantage of a corporation in the traditional sense is double taxation: ‘besides paying corporate income taxes, any dividends to shareholders are taxed again at the applicable tax rate’ (Harroch, 2006a, ‘Disadvantages of a C Corporation’).

Yet this can be avoided by forming an S corporation. There are two main forms of corporations: a C corporation and S corporation. S corporations have a status similar to Limited Liability Companies; ‘[t]his status allows the taxation of the company to be similar to a partnership or sole proprietor as opposed to paying taxes based on a corporate tax structure’ (Zahorsky, 2008, ‘What is an S Corporation?’). In addition, first years losses can be offset against personal income of the owner.

Therefore, corporations have their own advantages and disadvantages. In addition, two types of corporation also differ significantly in their attractiveness for businesspersons.
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