 In this discussion, we will discuss the discussion question of, describe the characteristics of a corporation. If we see a discussion question or essay question such as this, we can define a corporation and when doing so, we want to keep in mind other types of entities. What's the difference between a corporation, other types of entities such as a sole proprietorship or partnership? That can give us an idea by comparison of what a corporation is in comparison to other types of entities. So clearly a corporation has similarities as well to other types of entities. It is a form of business, a form of business, a business type. Its objective will be to generate revenue just like any other type of business type. But of course we're going to focus in on those things that differ typically when discussing a corporation. And I think the main thing is differing from a corporation to other types of entities as it being a separate legal entity. Most of the other things that we think about of differences in a corporation, advantages and disadvantages to a corporation stem from the fact that it is a separate legal entity. That's kind of like the invention of a corporation that really opened the door for a lot of innovation within business. This idea of a separate legal entity. So what does that mean? It means that we're going to give actual rights and privileges to a corporation which typically we had not given to anybody but individuals before. So it's almost like the corporation has characteristics given to it by the law as a person in some ways and some of those include the characteristic to own property and the characteristic of being responsible in terms of liability for those property. Why is that such a big benefit? It's going to be a huge benefit because if the corporation is thought of as a separate person and it gets sued then the corporation then is going to be liable but not necessarily the owners in the form of shareholders. That's different from a sole proprietorship or a partnership, a general partnership where we always keep the books separate. Remember that we always keep the books separate but in terms of a separate entity they're not a separate entity for a sole proprietorship or a partnership, a general partnership and therefore if the partnership or sole proprietor is sued the lawsuit can go after not just the business assets but personal after a personal home or something like that. The corporation allows us not to have that the shareholders should have some shield, a corporate shield and liability protection through their personal assets. Huge benefit because it really allows more investment so the corporate type of entity because of that has a benefit of capital investment from people like even normal people like myself if I want to put money into a corporation I can put it into a mutual fund even and put money into a corporation without knowing too much about it because if the corporation loses money then it should only lose the money that I invested in it. It shouldn't be exposing anything else to me. I shouldn't have to lose any of my personal assets like a home or something like that through the investment in the corporation. Therefore the corporation through the issuance of stock can typically generate more capital. That's going to be one huge benefit of the corporate form of entity. One of the disadvantages of the corporate form of entity is that because it is a separate legal entity it also has to pay taxes on the corporate level unlike a sole proprietorship or partnership. And the reason that's typically thought of as a disadvantage is because the thing that a corporation cannot do unlike an individual or a sole proprietor or a partnership is really just give the money that they've earned obviously the business is going to earn money and then give it to the owner in some way. Unlike an individual the corporation has individual rights it can't just give money to the owners so it can earn money it has expenses but it can't just give money to the owners because there could typically be a tax effect on that. So in other words when a partnership gives money to the owner it's called a draw and it's tax-free when a corporation gives money to the owner it's called a dividend which is typically taxed. And that means that the tax happened on the corporate level when it earned the revenue and then when that revenue is then taken out of the corporation and given to the owners it's typically taxed again on the individual level in terms of dividends. So that's going to be one of the major drawbacks of a corporate type of entity and again it kind of stems from this idea that it is a separate legal entity and therefore pays tax on the corporate level. The owners of the corporation are going to be stockholders so the stockholders are going to be the owners of the corporation. There's really pros and cons to that form of ownership as well. The great thing about the stocks is that they're all standardized so unlike a partnership where we have to keep track of each individual capital account for each individual partner the corporation we're just going to say hey all the stocks are the same they're all common stocks they're like tokens they're like money they're almost like currency they're all the same. How do we differentiate one partner or one owner not a partner one stockholder from another one owns more of these tokens they own more of the stock. So that really standardizes things and from a tracking standpoint for the financial statements we just have to basically know the number of stocks that are out there and the price of those stocks for reporting the financial statements we don't have to list in other words any individual owner. The other great benefit to that is that the owners of the stock then can easily trade the stock because they're all standardized they're all the same unlike a partnership where if we wanted to sell the partner or buy into a partnership it's a much more difficult type of transaction because it's all a unique transaction that we'll have to figure out whereas the standardization of the corporate stock allows us to really be able to trade more easily and to be able oftentimes to judge what the market price is through the trading process. Another advantage of a corporation is going to be that it can live past just like the life of the owners unlike a partnership or a corporate or a sole proprietor which at the point in time when the ownership changes what happens is the sole proprietorship basically goes down or the partnership basically is closed and then reopened if the partnership wants to continue at that point. But the corporation because it's a separate legal entity is going to live beyond any one individual because it's the stockholders that own it and the stock can always be transferred to another owner the corporation is separate from the owners it's a separate legal entity so if you trade stocks or if a stockholder dies or something like that the corporation does not it continues on and then theoretically of course a corporation which isn't physical doesn't die could have continued life forever theoretically into the future One more advantage is going to be that there's not that kind of agency problem that we see in a partnership type of organization in other words the partners if we have two partners that are directly involved in the partnership any of the partners that are involved can then have agreements with themselves and they can bind the partnership into those types of agreements which binds the other partners so the partners themselves are acting as agents of the partnership which binds the other partners in any agreement the corporation doesn't have quite that same problem it's got different kind of problems meaning because the stockholders are a step removed the stockholders really vote for the board of directors the board of directors then are the ones that are going to hire management so the board of directors then is hired management and therefore the management should be there in order to act on behalf of the stockholders but you don't have the same kind of agency problem with the owners making direct decisions in that case if in this case where if you have a large corporation where the stockholders are voting for the board of directors who are then hiring management now you do still have some kind of agency problems whereas management although they should be acting on behalf of the stockholders have different incentives to themselves personal incentives and there still could be agency problems as the management makes decisions that they have incentive to benefit themselves possibly not benefiting the stockholders ultimately and the choice can still get distorted so that's one of the cons of a corporation one of their cons of the corporation is also that it's more expensive there's more regulations to a corporation because it's a separate legal entity you have to set up the corporation and you have to do more recording and tracking on the corporation including things like filing taxes on a yearly basis and recording the taxes for the corporate legal entity