Response to the following problem:
Organizing a corporation is as simple as filing an application with the appropriate state agency. The approved application establishes the corporation as a legal entity, giving the corporation many of the same legal rights and risks as individuals, including owning assets, borrowing money, paying taxes, and being sued. The corporate form of business organization has several advantages over a sole proprietorship:
• Limited liability. The liability of stockholders is limited to their investment in the corporation.
• Supply of capital. Individuals are more willing to invest in a corporation because their personal assets are protected by limited liability. However, there are also some disadvantages to a corporation:
• Shared decision making. Significant business decisions must be approved by a vote of the stockholders.
• Shared profits. The earnings of the corporation are divided among the stockholders.
• Taxation. The earnings of a corporation may be subject to federal and state income taxes. When the earnings of the corporation are distributed to the stockholders, individual stockholders may also have to pay income taxes on the distributions. Thus, the earnings of a corporation can be taxed twice, a concept known as double taxation. Proper planning can offer stockholders the advantage of limited liability while avoiding the disadvantage of double taxation. Thus, although the organization application can be prepared without the help of an attorney or accountant, consulting with these professionals is recommended.
Critical Thinking:
1. Think of two businesses you might be interested in starting. Describe whether the proprietorship or corporation form of organization would be better suited for this business.
2. Often a person who has started a proprietorship and run it successfully for many years sells the business to a corporation. Why would a corporation be interested in buying such a business?