What is compney? Explain it's merit and demeit
Answers
Answer:
“A company is a voluntary organization of many persons who contribute money or money’s worth to common stock and employs it in some trade or business and who share the profit or loss arising, therefore.”
Explanation:
Advantages:
The important advantages of company form of ownership are as follows:
1. Limited Liability:
The liability of shareholders, unless and otherwise stated, is limited to the face value of shares held by them or guarantee given by them.
2. Perpetual Existence:
Deaths, insanity, insolvency of shareholders or directors do not affect the company’s existence. A company has a separate legal entity with perpetual succession.
3. Professional Management:
In company business, the management is in the hands of the directors who are elected by the shareholders and are well experienced persons. In order to manage the day-to-day activities, salaried professional managers are appointed. Thus, the company business offers professional management.
4. Expansion Potential:
As there is no limit to the maximum number of shareholders in a public limited company, expansion of business is easy by issuing new shares and debentures. Companies normally use their reserves for expansion purposes.
5. Transferability of Shares:
If the shareholders of a company are displeased with the progress of the business, they can sell their shares any time. During all this change of ownership, the business continues to operate.
6. Diffusion of Risk:
As the membership is very large, the whole business risk is divided among the several members of the company. This is an advantage particularly for small investors.
Disadvantages:
In spite of its several advantages, the company form of ownership also suffers from some disadvantages.
The important ones are:
1. Lack of Secrecy:
As per the legal provisions, a company has to make various statements available to the Registrar of the Companies, Financial Institutions; the secrecy of business comes down. It is further reduced when the company provides its annual report to the shareholders as the competitors do also find out the details of all financial data.
2. Restrictions:
Compared to proprietorship and partnership, a company has to comply with more legal requirements. It consumes considerable time and effort.
3. Management Mischief’s:
Sometimes the managers and directors misuse the company resources for their personal benefits. This brings losses to the company and company is closed.
4. Lack of Personal Interest:
Unlike proprietorship and partnership, the day-to-day affairs of a company are looked after by salaried managers. Since they are the employees not the owners, they do have hardly any personal interest and commitment in the company. This may result in inefficiency and, in turn, losses.
Corporations also have disadvantages compared to proprietorships and partnerships when it comes to taxation. Since the corporation and the stockholders are considered to be two different legal entities, they face the problem of double taxation, meaning that the owners are taxed twice.
If an owner of a corporation works for the corporation, he is paid a salary, and possibly bonuses, like any other employee. He pays taxes on this income, as do regular employees, reporting and paying the tax on his personal tax return. The corporation also pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead and other expenses.
Another issue that some might take as a disadvantage to corporations is that the stockholders are not actually owners considering the fact that they are not the decision makers, rather the management is the one that owns the corporation as they have all the decision making power.