Corporations : Advantages and Disadvantages of Corporations
A corporation is a legal business entity that is owned by more than one person. It borrows from the word ‘cooperate’, which means ‘pull together.?
It is a type of enterprise where shareholders have limited liability such that they cannot be individually held responsible for the debts incurred by the business. This treatment of the company owners as separate entities from the business is what really defines a corporation. Many companies are usually referred to as corporates because of this aspect.
Corporations have complex management structures because the shareholders do not necessarily manage the day to day operations of the business. They can elect a board of directors which has the responsibility of crafting company strategies as well as appointing employees in senior management positions.
Advantages of corporations
(i) It’s Easy To Raise Capital. Shareholders can always pull together and raise capital for the growth and expansion of the company. This is can be done through rights issues or by floating of company bonds. The same cannot be said for sole proprietorship where the business owner has the burden of raising capital.
(ii) Fast Growth and Expansion. Growth and expansion can be achieved much faster because of the availability of capital. Shareholders can always be called upon to invest more money in order to push the growth of the company.
(iii) Several checks and balances. Corporations have several checks and balances to ensure that company owners and the management do not misuse funds. This ensures that the best interests of the business carry the day.
(iv) Able to attract the best talent. Corporations can attract the best pool of talent to manage and oversee operations. This is because they have sufficient resources to afford highly skilled and well-trained professionals to run them.
(v) Continuity. The business will always exist whether a shareholder leaves or even dies. With corporations, continuity is assured and that inspires confidence in customers, employees, and investors.
(vi) Limited liability. Shareholders cannot be held personally responsible for the debts incurred by the company. This is a good thing because in most cases they do not even participate in the day to day running of the business.
(vii) Separate legal entity. A corporation enjoys several benefits that an individual business owner also enjoys. It can sue, enter into contracts and borrow money.
Disadvantages of Corporations
(i) Shareholders do not directly run the business. The interests of shareholders in the business are represented by the board of directors. This lack of direct control of business operations means that sometimes these interests are never well taken care of.
(ii) Complex structure. The management structure of a corporation creates a lot of bureaucracy which makes conducting business difficult. There are so many processes that can lead to loss of business. There is also a lot of paperwork involved such regulatory filings, minutes, memorandum and articles of association. The frequent board meetings can also be a bore.
(iii) Difficult to wind down. In a sole proprietorship, the business owner can just wake up one day and decide to close the business. It is much more difficult to wind down a corporation. Even the process of selling shares for a shareholder that wants to opt out is complex.
(iv) Not easy to form. It’s not easy to form a corporation either. There are a lot of paperwork and legalities that are involved. It takes much time to set up and sometimes the process can be slow and tiring.
(v) Difficulty in decision-making. One thing that is common with many corporations is that employees do not easily make decisions due to fear of personal responsibility for consequences. It can take a while before even a simple thing is decided upon.
(vi) Profits shared by many. Corporations make huge profits but they are shared among several people and interests. Employees usually get bonuses when a company performs well while shareholders receive dividends which sometimes are too little to make any meaningful difference in their lives.
Conclusion
Nearly all of the billion dollar businesses in the world are corporations. This shows that despite their shortcomings, they are the best bet for financial success. They can easily expand and generate a lot of revenue for the owners, something that individually owned businesses would find hard to achieve.
