Why are most large businesses organized as corporations?
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The major reason for this is liability. It is much more sensible for a business to organize as a corporation than to remain as a sole proprietorship or a partnership.
When a business is organized as a corporation, its owners are protected from the debts incurred by the corporation. If the corporation goes bankrupt, only the money that the owners have invested in the corporation is lost.
By contrast, if a business is a proprietorship or partnership and goes bankrupt, the owners are liable for all the debts. Their personal fortunes (like whatever equity they have in their home or in their retirement accounts) is liable to be taken to pay of their creditors. This is an unacceptable amount of risk for most people.
A corporation has several advantages over a business:
- Limited owner liability: The owner of a business is liable for its failure and his property and other assets can be used by creditors to recover their capital. In comparison, the liability of any person in a corporation is equal to (or proportional to) his share in the corporation.
- Longevity: A corporation has practically infinite life as the ownership can change when needed. A business, in comparison, is owned by an individual and thus has (potentially) limited life.
- Raising money: Its much easier for people and investors to trust a corporation as compared to a single person and thus its easier for corporations to raise money from the market.
- Professional management: Corporations are more professionally organized as compared to business and inspires more confidence in both investors and clients.
- Credibility: Corporations are generally more credible than an individual and gives a signal that they are here to stay, thus lending credence.
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