While there are significant advantages to forming a corporation, there are also many risks and drawbacks that may occur for investors in the process. Corporations are highly-leveraged assets which take on large amounts of monetary risk in order to achieve large amounts of profit. Understanding these risks will help to explain the ways that corporations operate and the constraints that are placed upon their actions by real world economic factors.
One of the advantages of the large amounts of capital that corporations are able to assemble by their nature is that this also allows them to also leverage a very large amount of debt in order to finance large new ventures. This is a great competitive advantage and gives great freedom of action to most corporate executives. There is also risk, however, as many corporations have discovered that were forced into bankruptcy.
Every organization of any kind gradually forms a sort of culture within its workforce that defines everything from the way that tasks are performed to the way that individuals may advance through the ranks. Every successful corporation has created its own unique culture that is particularly suited to its major tasks. The risk is that, given the size of most corporations, a negative culture might form that will be difficult to change in the future.
Given the size of corporations and the large influence that they have on the general economy there is a great risk of incurring losses from taxes and regulations that smaller companies can avoid. The risks can be even more serious depending on the industry a corporation operates within. Also, there are risks of corporations becoming overly large and unable to adapt to the quick changes of smaller, more nimble competitors with newer approaches.
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