Advantages and Disadvantages of Incorporation
Advantages of Incorporation
Separate Legal Entity
The company is legally distinct from its owners (shareholders). It can own property, enter contracts, sue, and be sued in its own name.
Limited Liability
Shareholders’ liability is limited to the amount unpaid on their shares. Personal assets are protected from company debts.
Perpetual Succession
The company continues to exist even if shareholders or directors change or pass away. It has an indefinite life.
Ease of Raising Capital
Companies can raise capital more easily by issuing shares and debentures to a wide range of investors.
Transferability of Shares
Shares of a company can be transferred easily, providing liquidity to shareholders.
Professional Management
The company can appoint professional managers, enabling better business management.
Tax Benefits
Companies may enjoy tax advantages and incentives not available to sole proprietors or partnerships.
Credibility and Prestige
Being a registered company often enhances the reputation and credibility with customers, suppliers, and lenders.
Disadvantages of Incorporation
Complex and Costly Formation
Incorporation involves formalities like registration, drafting of documents, legal fees, and compliance with regulations, which can be expensive and time-consuming.
Regulatory Compliance
Companies must comply with many statutory requirements such as annual filings, audits, and disclosures, which increase administrative burden.
Double Taxation
Profits are taxed at the company level, and dividends paid to shareholders are also taxed, leading to double taxation.
Lack of Secrecy
Companies must disclose financial and operational details publicly, which may reveal business information to competitors.
Limited Control for Founders
In a company with many shareholders, the original owners may lose control due to dilution of shares or board decisions.
Slower Decision-Making
Due to formal procedures, boards, and meetings, decision-making can be slower compared to sole proprietorships or partnerships.
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