Page 160 - Business Principles and Management

Chapter 6 • Corporate Forms of Business Ownership

Disadvantages of Corporations

Although there are several distinct advantages to the corporate form of owner-
ship, there are also disadvantages. A discussion of some of the major disadvan-
tages follows.

TAXATION
The corporation is usually subject to more taxes than are imposed on the pro-
prietorship and the partnership. Some taxes that are unique to the corporation
are a filing fee, which is payable on application for a charter; an organization
tax, which is based on the amount of authorized capital stock; an annual state
tax, based on the profits; and a federal income tax.
Another tax disadvantage for corporations is that profits distributed to
stockholders as dividends are taxed twice. This double taxation occurs in two
steps. The corporation first pays taxes on its profits as just described. Then it
distributes some of these profits to shareholders as dividends, and the sharehold-
ers pay taxes on the dividends they receive. Most other industrialized countries
do not permit double taxation on corporate profits. (Small close corporations
with few stockholders may avoid double taxation by changing their form of
ownership, which you will learn about later in this chapter.)

GOVERNMENT REGULATIONS AND REPORTS
A corporation cannot do business wherever it pleases. To form a corporation, an
application for a charter must be submitted to the appropriate state official,
usually the secretary of state. York, Burton, and Chan, Inc., has permission to
conduct business only in the state of New York. Should it wish to conduct busi-
ness in other states, each state will probably require the corporation to obtain a
license and pay a fee to do business in that state. State incorporation fees are not
very expensive. The attorney’s fee accounts for the major costs of incorporating.
Each state has different laws that govern the formation of corporations.
The regulation of corporations by states and by the federal government is
extensive. A corporation must file special reports with the state from which it
received its charter as well as with other states where it conducts business. The
federal government requires firms whose stock is publicly traded to publish
financial data. As a result, there is a greater need for detailed financial records
and reports.
Success tip
STOCKHOLDERS’ RECORDS
Corporations that have many stockholders have added problems—and ex-
penses—in communicating with stockholders and in handling stockholders’ Money management is
records. By law, stockholders must be informed of corporate matters, noti- considered one of the top
fied of meetings, and given the right to vote on important matters. Letters career fields of the future.
and reports must be sent to stockholders on a regular basis. In addition, each Many people are interested
time a share of stock is bought or sold and whenever a dividend is paid, de- in investing in companies
tailed records must be kept. Keeping records for the thousands of stockhold- to build their retirement
ers of General Electric, for example, is a time-consuming and costly task. income and maximize
their future savings. To be
CHARTER RESTRICTIONS a money manager, look at
careers in business, account-
A corporation is allowed to engage only in those activities that are stated in its ing, and finance.
charter. Should York, Burton, and Chan, Inc., wish to sell hardware, the organizers

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