Page 122 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Unit 8: Setting up a Small Business Enterprise

for corporate debts is limited, in general, to the amount of money each owner has Notes
contributed to the corporation. Unless the corporation is essentially a shell for a one-
person business or unless the corporation is grossly under-capitalized or under-insured,
the personal assets of the owners are not at risk if the corporation fails. The shareholders
stand to lose only what they invested. This factor is very important in attracting investors
as the business grows.
2. A corporation can have a perpetual existence. Theoretically, a corporation can last forever.
This may be a great advantage if there are potential future changes in ownership of the
business in the offing. Changes that would cause a partnership to be dissolved or terminated
will often not affect the corporation. This continuity can be an important factor in
establishing a stable business image and a permanent relationship with others in the
industry.
3. Unlike a partnership, in which no one may become a partner without the consent of the
other partners, a shareholder of corporate stock may freely sell, trade, or give away his or
her stock unless this right is formally restricted by reasonable corporate decisions. The
new owner of such stock is then a new owner of the business in the proportionate share of
stock obtained.

Disadvantages

Following are the various disadvantages of corporation form of business:
1. Loss of Individual Control: Due to the nature of the organizational structure in a
corporation, a certain degree of individual control is necessarily lost by incorporation.
The officers, as appointees of the board of directors, are answerable to the board of
management decisions.
2. Technical Formalities: The technical formalities of corporation formation and operation
must be strictly observed in order for a business to reap the benefits of corporate existence.
Corporate meetings, both at the shareholder and director levels, are more formal and
more frequent. In addition, the actual formation of the corporation is more expensive than
the formation of either a sole proprietorship or partnership. The initial state fees that must
be paid for registration of a corporation with a state can run as high as $900.00 for a
minimally capitalized corporation. Corporations are also subject to a greater level of
governmental regulation than any other type of business entity. These complications
have the potential to overburden a small business struggling to survive.
3. Finally, the profits of a corporation, when distributed to the shareholders in the form of
dividends, are subject to being taxed twice.

Self Assessment

Fill in the blanks:
9. A ………………….. is both the simplest and the most prevalent form of business
organization.
10. The liabilities of the business are …………….. to the owner and the business ends when
the owner dies.
11. The most appealing advantage of the sole proprietorship as a business structure is the
total ……………. the owner has over the business.

12. The ……………. or …………….. of the sole proprietorship are considered personal to the
owner.

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