What are the major advantages and disadvantages of incorporating a business?

What are the major advantages and disadvantages of incorporating a business?

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December 28, 2020
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What are the major advantages and disadvantages of incorporating abusiness?What is the role of owners (stockholders) in the corporate hierarchy?If you buy stock in a corporation and someone gets injured by one ofthe corporation’s products, can you be sued? Why or why not?Why are so many new businesses choosing a limited liability company (LLC) form of ownership?

Answer and ExplanationSolution by a verified expert

What are the major advantages and disadvantages of incorporating a
business?

Explanation

A corporation is made up of a large number of shares that can be traded with other individuals in the stock market to raise a huge amount of resources for the business. Here, the shareholders/owners invest a specific amount of money into the corporation and they are only responsible for paying out for the losses to the extent they have invested for the business. Also, the owners and the corporation are separate bodies. For handling day-to-day business activities a management body is created and they can raise resources from other individuals outside of the corporation to run the business efficiently.  A large number of resources help in improving various business units and bringing in more expertise that can help to scale the business.
 
On the other hand, the initiation of a corporation involves huge capital investment and the assistance of specialists like lawyers who charge hefty fees for the same. Also, the process is full of lengthy paper works and complex details which have to be maintained not only during the incorporation but also during the functioning of the business. As a large number of individuals are a part of the business, both as owners and shareholders there is a high possibility of dispute in their business decisions. The corporation has to pay two taxes, one as a corporate entity while giving out the profits to the shareholders and the other by the shareholders as the income tax on the profits they received by the business  Lastly, winding up of the corporation is a highly expensive and time-consuming process.

Sample Response

Benefits of incorporating a business are-

More resources - The shares can be sold in the stock market to bring in more cash for the business.
Limited liability - The liability of the business members are only limited to the amount invested by them.
Separate entity - The owners are not responsible for managing day to day activities of the business.
Perpetual succession  - The death of any owner will not result in the winding up of the corporation.
Ease of expansion - Its ability to raise cash from the stock market helps in higher growth of the business.

Drawbacks of incorporating a business are-

Huge expenses - A large amount of money to be spent during the initial days of starting a business.
Extensive procedure - It involves complex and lengthy paperwork throughout the incorporation.
Potential conflict - Conflict of interests among the owners and the management might not be progressive for the future of the business.
Tax burden - The tax is levied twice and has to be paid both by the corporation and the shareholders/owners.
Difficult closing procedure - Dissolving the entity is as extensive and lengthy affair as starting the business.

 
 
 
 
 
 
 
 
 
 
What is the role of owners (stockholders) in the corporate hierarchy?

Explanation

They have a say in the major decisions of the corporations, like in mergers and acquisitions. The shareholders have the right to inspect the financial statements of the corporation. They have a right to sue the corporation for any illegal or unethical acts. Every shareholder has the right to transfer his/her ownership by selling his/her share of the corporation's stocks to someone else. Therefore, the owners of the corporation can change from time to time.

Verified Answer

The shareholders are called the owners of the corporation. The reason they are called owners is that they own the stocks of the corporation, wherein they have invested their money for the running of the corporation. Therefore, the corporation's main motive is to work for the best interests of the shareholders, along with making the maximum possible profits. The shareholders have certain rights that are given to them. They have the right to elect the board of directors of the corporation.

 
 
 
 
 
If you buy stock in a corporation and someone gets injured by one of
the corporation’s products, can you be sued? Why or why not?

Explanation

In a corporation, shareholders play a major part in influencing the overall management. But their control is only limited to the money they bring in the corporation and elect the board the directors. Wherein the board of directors are responsible for the day to day activities of the business and handles the employees, customers, or product of the corporation. So, the shareholders might be the owners of the corporation but they don't have real control over the operations.

Verified Answer

The buyer of the shareholder cannot be sued if the product of the corporation has caused any damage to the consumers. The shareholder's authority is limited to the money they bring in for the business and they do not participate in controlling the operations.

 
 
 
 
Why are so many new businesses choosing a limited liability company (LLC) form of ownership?

Explanation

A limited liability corporation provides various kinds of relaxation to the owners. They are saved from dual taxation and has the right to choose how they can pay their taxes either as a corporation or owners in terms of income tax. There is also no limit on the number of owners the corporation should have , the number can be more than 100 . The profits or income of the corporation can be distributed based on a mutual agreement among the owners and not generally have to be based on the investment each owner has made into the business . Also, the owner is not personally liable for business losses caused by other owners and their liability is limited to the amount they have invested. Lastly, there is no obligation for the corporation to hold regular meetings and record the details of the meetings which reduces the paperwork and unnecessary expenses.

Verified Answer

Limited liability is popular because of the following reason -

Tax flexibility - The owners can decide to pay the taxes either as corporate tax or income tax.
No restrictions on ownership - The number of owners can be more than 100.
Division of income - The profits not necessarily have to be distributed equally among the owners.
Limited liability - Owners are only liable to pay for the debts to the extent of their investment.
Flexibility in management - Do not have to hold regular annual meetings or write down all the details of the meetings.

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