What Are Two Main Advantages That a Corporation Has Over a Proprietorship and a Partnership?
A corporation has the unique advantage of true separation of the owner with the business. This means that the corporation files a separate tax return from its shareholders. In contrast, there is less separation of the business from its owner in a sole proprietorship or partnership structure. In addition, transfer of ownership in a corporation can be done through issuance of shares, a legally binding instrument that is widely recognized by investors.
A corporation is a legal entity that is separate and distinct for its owners, called shareholders. What this means is that the corporation can enter binding agreements apart from its owners. In other words, a corporation's assets and liabilities are separate from its owners. This protects shareholder assets should the corporation default on its debt obligations and creditors are seeking to sue the company.
Corporations are ideally suited to raise capital through the issuance of shares. Each share represents a fractional ownership interest in the corporation. It is easy for an investor to calculate his ownership stake in a corporation. For example, if there are 500,000 shares outstanding and an investor owns 5,000 shares, his ownership stake is 1 percent. Many of the largest corporations raise money in the capital markets by offering their shares to the public. Their shares trade daily on a stock exchange and there is a wealth of information readily available to new investors. Because of this, the corporate structure is favored by outside investors over other business operating structures.
Unlike the separate identity a corporation enjoys, sole proprietorship and partnerships are strongly tied to their owners. While there may be some distinction when it comes to certain financial transactions, the owners of these business operating structures face greater scrutiny regarding business transactions, as they are the face of the organization. This lack of anonymity exposes the owner to the risk that he is ultimately responsible for liabilities of the business. Sole proprietorships and partnerships are free to seek outside investors. However, they cannot sell shares that are traded on public markets as corporations can. Investment by outsiders is thus less appealing, and many sole proprietorships and partnerships are closely held by company founders.
Corporations file taxes apart from shareholders. A downside of the corporate structure is the double taxation that shareholders face if the corporation pays a dividend. In this case, the corporation pays income tax on its profits and shareholders pay taxes on their share of the profits distributed as dividend income. A shareholder can enjoy the appreciation in the value of his shares and pays taxes on the capital gain only when he sells his shares. In contrast, a sole proprietor or partner must report his share of the profits (or loss) from the business on his personal income tax return.