Advantages and Disadvantages of Companies or Corporations
What is a company or corporation? The word ‘company’ comes from the Old French word for ‘companion’ and it refers to a group of people who are united by common goals or aims. The word ‘corporation’, which comes from the Latin for ‘to combine into one body (of people)’, has the same meaning. So, these words are often used interchangeably.
Companies and corporations are legal entities. When a business is set up, and legally registered as a company or corporation, its legal status changes. For example, the company will be liable to pay corporation tax.
One of the key things to note about the definition of a company is that a company is a group of people which is authorized by law to act as a single entity. Some lawyers argue that a company can even be thought of as a kind of individual person in its own right.
Advantages of Companies
- Legal recognition: The law recognizes a company as a distinct, individual entity in its own right, able to make its own decisions.
- Limited liability: Shareholders often find holding shares in companies more attractive than (for example) going into partnership because they have limited or no liability for the debts of the company. By contrast, in a partnership, partners can be both jointly and severally liable for each other’s debts.
- Strength in numbers: A company is by definition a group of people working together. This makes the overall pool of talent, skill and expertise much wider and more diverse.
- Prestige: Once a company’s name gets known among the general public, it starts to carry with it a certain prestige that attracts high calibre employees and shareholders.
- Ownership can easily be transferred: Some business structures, such as partnerships, make it very hard to change who owns the business. This is not the case with corporations, where ownership can be transferred simply by transferring the shares from one shareholder to another. So, if one shareholder wants to leave the company they can do so without disrupting its operations.
- The importance of teamwork: Humans are social beings, and being part of a corporation enables us to work together in a team to achieve our goals.
- Pooling finances: Putting finances together when they join a corporation enables businesspeople to have a lot more financial weight than they would if they were acting as individuals.
Disadvantages of Companies
- The intricacies of the structure: Companies can have rather complex structures, where finances, rules and regulations and shares are all linked together in a way that can be difficult to understand.
- The paperwork involved: If you do not enjoy admin, then perhaps being part of a corporation’s ownership is not for you! If you are an owner of a company, you can expect there to be plenty of committees, board meetings, regulatory filings and other administrative tasks taking up your time.
- The directors have a lot of power: If you are not one of the company’s directors yourself, you may feel that they wield too much power over your decisions.
- Indirect control of shareholders: Shareholders, who are the real owners, have limited control in the day-to-day activities of the company.
- Double taxation: In many countries, corporations have to pay tax twice on their earnings. First, the corporation pays tax on its profits. Then, they pay the dividend distribution tax (DDT) on the amount paid to the shareholders as dividend.
Conclusion
A company or corporation is a good example of how working together with others in the business world has many advantages – not least in terms of maximizing profits. However, there are several restrictions involved in being part of a company, and it is good to be aware of these before becoming part of a company.
