Q.1.What are the major advantages and disadvantages of the
corporate form of organization as compared to sole
proprietorship and partnership?
Corporations enjoy many advantages over partnerships and sole
proprietorships. But there are also disadvantages.
Stockholders are not liable for corporate debts.
This is the most important
attribute of a corporation. In a sole proprietorship and partnership, 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. On the
other hand, if a corporation runs out of funds, its owners are usually not liable.
that under certain circumstances, an individual stockholder may be liable
for corporate debts. This is sometimes referred to as "piercing the corporate veil."
Some of these circumstances include:
If a stockholder personally guarantees a debt.
If personal funds are intermingled with corporate funds.
If a corporation fails to have director and shareholder meetings.
If the corporation has minimal capitalization or minimal insurance.
If the corporation fails to pay state taxes or otherwise violates state law
(like defrauding customers).
Self-Employment Tax Savings.
Earnings from a sole proprietorship are subject to
self-employment taxes, which are currently a combined 15.3% on the first
$97,500 of income for tax year 2007. With a corporation, only salaries (and not
profits) are subject to such taxes. This can save thousands of dollars per year.
For example, if a sole proprietorship earns $80,000, a 15.3% tax would have to
be paid on the entire $80,000. Assume that a corporation also earns $80,000, but
$40,000 of that amount is paid in salary, and $40,000 is deemed as profit. In
this case, the self-employment tax would not be paid on the $40,000 profit. This
saves you over $5,000 per year.
The life of a corporation, unlike that of a partnership or sole
proprietorship, does not expire upon the death of its stockholders, directors, or
Easier to raise money.
A corporation has many avenues to raise capital. It can