A corporation (from Latin “corpus", literally “body") is considered to be a person who is completely separate from its owners. Owners are known as shareholders because they own only a share or part of the organization. Like a person, corporations may own property and assets, take on debt to finance operations, and sell shares to raise money. The corporation enjoys four major advantages that, when combined, make this type of organization attractive for large ventures.
Owner liability is limited to the loss of the value of shares held. Owners’ entire wealth is not in jeopardy if the corporation goes bankrupt or ceases operation. The most an owner can lose is the value of the investment from buying shares of the corporation. The owners of sole proprietors and partnerships can lose more than just the value of the business.; their entire wealth is on the line.
When owners die, shares of the corporation can be willed to family members or other entities just like any other asset. A corporation can theoretically live forever as long as it remains profitable.
Transferability of Ownership
Selling ownership of a corporation is simply a matter of selling shares to a buyer willing to pay the price of the shares. Exchanges, such as the New York Stock Exchange, are markets created for the purpose of selling shares of corporations. Selling a sole proprietorship or partnership is a far more involved process which usually necessitates legal representation, contracts, and valuation procedures.
Access to Capital
The permanent nature of corporations makes capital easier to acquire as lenders do not have to worry about the death of its owners. Corporations are far more flexible in their ability to take on debt.
The corporation does have one major disadvantage. Income made by the corporation is taxed twice. The first taxation occurs because the corporation is considered to be a person and, therefore, is taxed accordingly. Then, the income gained through ownership of the corporation is taxed as personal income in the owners’ income tax. This double taxation dilutes the profitability of the corporation and makes ventures that much more risky because they cost more. Essentially, corporations must get a greater return on investments to cover the corporation’s taxes while still maintaining profitability to shareholders.
Clearly, corporations have some major advantages over the other two organizational forms Limited liability, permanency, transferability of ownership, and easier access to capital make corporations the best choice when large ventures are planned.