A corporation is a legal entity, organized under state laws, whose investors purchase shares of stock as evidence of ownership in it.
The advantages of the corporation structure are as follows:
- Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability.
- Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.
- Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.
- Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.
The disadvantages of a corporation are as follows:
- Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
- Excessive tax filings. Depending on the type of corporation, the various types of income and other taxes that must be paid can add up to a substantial amount of paperwork.
- Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.
A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on an exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held.
