What are the merits and shortcomings of a corporation as a business entity?

Merits of a corporation as a business entity:

Upon incorporation a company becomes a legal person distinct and separate from its members. The registered company is the most advanced form of business association. This is because the merits of a company outweigh the shortcomings by far:

Limited liability: Members are generally not liable for debts and other obligations of the company since their liability is limited by shares or guarantee.

Wide capital base: compared to other forms or business association, companies generally have more capital by reason of wide spectrum of membership.

Perpetual succession: The fact that a registered company has capacity to exist in perpetuity encourages longterm investment.

Qualified or specialized management: Under Section 177 of the Act, every public company must have at least 2 directors and every private company must have at least one. Directors

are elected by members in general meeting. Members have an opportunity to elect qualified persons as directors.

Owning property and capacity to contract: The fact that a registered company can own or hold property and enter into contractual relationships means that it has capacity to invest to enhance profitability.

Sue or be sued: Shareholders are not obliged to sue to remedy wrongs done to the company and generally cannot be sued for the wrongs of the company.

Transferability of shares: Shares in public and private companies are transferable, however, they are really transferable in public companies.

Borrowing by floating charge: Registered companies can utilize the facility of floating charge to borrow. This is an equitable charge securing a debenture on the assets of a going concern but which remain dormant until crystalisation. A registered company may therefore use the goods it deals with in the ordinary course of business as security for a loan.

Shortcomings of a corporation as a business entity:

Formalities: Companies are characterized by formalities from incorporation to winding up. Formation of a registered company is subject to the provisions of the Companies Act. During its existence, it must file annual returns with the registrar, hold general meetings etc.

Publicity: Companies are subject to undue publicity. Promoters must notify the registrar of the name of the intended company. A company‟s public documents e.g. memorandum, articles, special resolutions etc are open to scrutiny by the public. A public company must publish annual accounts and the winding up of a company is conducted in the public eye.

Expenses: The registered company is the most expensive form of business association to form, maintain and wind up. Formation expenses include: legal fees, registration fees, stamp duty. A company must have directors, auditors and board meetings. The winding up of a company is an expensive exercise.

Corporation tax: This tax payable by registered companies is comparatively higher than Income tax. It reduces the amount of profit distributable to members by way of dividend.

Ultra vires/inflexibility: They do not enjoy as wide contractual capacity as partnerships or sole proprietorships. They cannot change the nature of business at will. A company‟s capacity is restricted to transactions set forth in the objects and those that are reasonably incidental to the attainment or pursuit of the express/such object. Other transactions are ultra vires the company and null and void.

Participation in management: Members other than directors do not participate in the day to
day management of a company‟s affairs.

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