Advantages and Disadvantages of Business Organizational Structures for a Corporation

The corporate organizational business structure presents a variety of advantages and disadvantages for the company and its owners. Three of the main advantages found in a corporate structure are the separation between corporate liabilities and the owner’s personal liabilities, the ease of ownership transfer and the tax treatment conveyed upon the corporation. Some of the disadvantages found in corporations include the extensive reporting requirements of public companies and the inability to adjust and deal with a changing business environment.

Limited Liability

A corporation’s liabilities are separate from the personal liabilities of its owners. This means that the owners’ risk of loss is up to their investment in the corporation and they are not liable for the company’s obligations. The corporate entity, recognized as a separate legal entity apart from its owners, has sole responsibilities for liabilities and obligations entered into under the corporate name.

Ownership Transfer

The purchase of stock conveys ownership in the corporate structure. Stock can easily be purchased and sold in the open market, so transfer of ownership occurs seamlessly. Anyone can purchase the company’s stock and receive its benefits and be subject to its losses. Special approval or capital requirements are not necessary to invest in a corporation. As long as you can afford to pay for the price of the stock, you can buy stock and sell it at your leisure.

Tax Treatment

Since the corporate structure is its own separate entity, it is also taxed separately from its owners. The corporation pays taxes on income earned and shareholders pay income tax when earnings are distributed via dividends. The corporate tax in many instances tends to be much lower than personal tax rates, so until dividends are paid personal taxation of income can be delayed. This arrangement has a negative aspect -- double taxation. The taxed corporate profits that are distributed are taxed again at the personal tax rate level.

Reporting Requirements

Public corporate entities have extensive reporting requirements imposed by the Securities and Exchange Commission. Reporting must follow strict guidelines and disclose specific information on the entity. Annual financial statements must be audited every year by a certified public accountant, who publishes an auditor’s report included with the statements that states if the financial information is fairly presented. Corporate resources are needed and used up when complying with these reporting and audit requirements.

Dealing with Change

Large corporations can have a hard time dealing with a changing business environment. The various layers of operations and management found in large corporate structures can sometimes cause a disconnect between employees who notice changes taking place at the consumer level and the decision makers at the top. This can lead to a loss of profits and business opportunities. Smaller competitors may react more quickly and seize market share, forcing the corporate entity to play catch-up.

References

• “Business: CPA Exam Review”; DeVry/Becker Educational Development Corp.; 2009