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Additional reading. Lecture on company law. Do the task. In today’s lecture, I’ll be addressing what a corporation is, specifically, how it differs from a sole proprietorship and partnership
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ADDITIONAL READING
Text 1
LECTURE ON COMPANY LAW
Part I
In today’s lecture, I’ll be addressing what a corporation is, specifically, how it differs from a sole proprietorship and partnership. A corporation is a separate and distinct legal entity. This means that it can open a bank account, own property and do business, all under its own name. The main advantage of a corporation is that its owners, known as stockholders or shareholders, are not personally liable for its debts and liabilities. For example, if a corporation gets sued and is forced into bankruptcy, the ‘owners’ will not be required to pay the debt with their own money. If the assets of the corporation are not enough to cover the debts, the creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.
A corporation is managed by a board of directors, which is responsible for making major business decisions and overseeing the general affairs of the corporation. These directors are elected by the shareholders of the corporation. The officers, who run the day-to-day operation of the corporation, are appointed by the directors.
One major disadvantage of a traditional corporation is double taxation. It pays corporate tax on its corporate income (the first tax). Then, when the corporation distributes profit to its stockholders, the stockholders pay income tax on those dividends (the second tax). One way to avoid double taxation is to choose to be taxed as a pass-through entity, like a partnership or a sole proprietorship. That way, there is only one level of taxation. The corporate profit ‘passes through’ to the owners, who pay taxes on the profit at their individual tax rates.
Do the task.
Answer the questions:
1. What is the most important advantage of a corporation?
2. What significant disadvantage does the lecturer mention?
3. How can double taxation be avoided?
Text 2
LECTURE ON COMPANY LAW
Part II
As I was saying, corporations enjoy many advantages over other business entities. However, the main advantage of a corporation is that stockholders are not liable for corporate debts. This is the most important characteristics of a corporation. In contrast, in case of a sole proprietorships and partnerships, the owners are personally responsible for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner’s personal bank account, house, etc. to make up the difference. As we’ve seen, if a corporation runs out of funds, its owners are usually not liable.
The second benefit of corporations is self-employment tax savings. Earnings from a sole proprietorship are subject to self-employment taxes. With a corporation, only salaries (and not profits) are subject to such taxes.
The third advantage of a corporation is its continuous life. The life of a corporation, unlike that of a partnership or sole proprietorship, does not expire upon the death of its stockholders, directors or officers. The fourth advantage is the fact that it is easier for a corporation to raise money. A corporation has many avenues to raise capital. It can sell shares, and it can create new types of stock, with different voting or profit characteristics.
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The fifth and the last advantage is the ease of transfer. Ownership interest in a corporation may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses and permits must be individually transferred, and new bank accounts and tax identification numbers are required.
Right, let us move on to the disadvantages. The first of these drawbacks is the higher costs. Corporations cost more to set up and run than sole proprietorship or partnership. For example, there are the initial formation fees, filing fees and annual state fees.
The second disadvantage is the formal organization and the corporate formalities. A corporation can only be created by filing legal documents with the state. In addition, a corporation must adhere to technical formalities. These include holding board and shareholder meetings, recording minutes, having the board of directors approve major business transactions, and corporate record-keeping. If these formalities are not observed, the stockholders risk losing their personal liability protection. While observing corporate formalities is not difficult, it can be time-consuming. This is not the case with either a sole proprietorship or partnership, both of which can start and operate without any formal organization or operating procedures – not even a written agreement.
The third and final disadvantage is unemployment tax. A stockholder-employee of a corporation is required to pay unemployment insurance taxes on his or her salary, whereas a sole proprietor or partner is not.
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