Disadvantages of Forming a Corporation

Essay by mysterygirl_danger February 2008

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Advantages and Disadvantages of forming a Corporation Advantages to Forming Corporation When a business forms, owners make a decision as to the type of entity the business is to become. The owners need to decide which form of business will best suit their needs. However, when forming a corporation certain advantages exist that sole proprietors and partnerships do not have. Some of these advantages include being a separate legal entity with limited liability, ease of generating capital and transferring ownership, lack of mutual agency and continuous existence to name a few.

By having a business with a separate legal entity, the business is treated similar to how a person is treated. The business can enter into contracts, own property, sue and be sued in addition to hiring and firing employees. Since the corporation is a separate legal entity, any creditors that take action against the corporation can only satisfy claims against the personal property that the corporation holds, not the personal property of the owners.

Furthermore, because the corporation is a legal entity, the company is not affected by the death, incapacity, or withdrawal of an owner (Needles, Powers and Crosson, 2005).

Generating capital and transferring ownership is also easier for a corporation. A lending agency looks at the credit history and rating of the corporation, not the owners, when making lending decisions. The corporation can issue stocks to generate capital resulting in many various owners in the company. Stockholders can buy and sell shares easily without affecting the operations of the corporation. Additionally, because the corporation has a lack of mutual agency, none of the stockholders can act as an owner by entering the corporation into a contract.

Disadvantages in forming a CorporationA corporation offers unique advantages and disadvantages. Just as there are advantages in forming a...