Section 1: Starting a Small Business

The Advantages of Corporations

One of the main reasons the corporate form of ownership is popular is that it can quickly raise large sums of money. Another reason has to do with limited liability. The amount of money any one shareholder can lose is limited to the amount invested in the company. This is because shareholders cannot be held personally liable for the corporation's losses. They may find that their stock is not worth anything if the corporation fails, but that is the most they can lose.

A further advantage is permanence. In the case of a sole proprietorship, if the owner dies and there is no one to take his or her place, the business often closes its doors. The same is true of a partnership. A corporation, on the other hand, usually carries on. Its life is not ended by the death of a stockholder, a director, or an officer. Therefore, a corporation has more assurance of a longer life than the two former types of ownership.

Lastly, the corporation itself can sue or be sued, whereas the owners of a proprietorship or partnership can be sued directly by customers and suppliers. Only under special circumstances-such as fraud or gross negligence-can the shareholders sue the directors of a company.

The Disadvantages of Corporations

What are the drawbacks? The three main ones are

• a corporation pays more taxes than a proprietorship or a partnership

• it cannot operate as freely as proprietorships or partnerships because of regulatory laws

• the owners of a corporation often do not have as much direct interest in the firm as proprietors or partners (The main concern of most stockholders is to make money on their investment. They are not interested in doing any actual work to help the business succeed.)

Despite these drawbacks, millions of people invest in corporations by buying stock. Many big businesses like General Electric, RCA, and Safeway are owned by thousands of shareholders. It is relatively easy to purchase their stocks.

In a large corporation, the shareholders' money is reasonably safe and they have a good chance of earning dividends on their investments. Shareholders have no responsibility for a corporation's debt if it fails.