Question: Ownership shares of most corporations can be transferred. Thus, the life of a corporation can extend
indefinitely. Caswell-Massey Co., a “purveyor of luxury personal care products,” was incorporated in 1752 in
Rhode Island and continues to do business today.
Investors are able to move into and out of these investments quickly. In addition, the availability of limited liability
restricts potential losses to the amounts invested. These characteristics help explain the immense popularity of
the corporate form. However, a significant number of partnerships and proprietorships still come into existence
each year. If no problems were possible, incorporation would be the only practical option. What disadvantages
are associated with corporations?
Answer: Incorporation is often a time consuming and costly legal process. However, in most states,
proprietorships and partnerships can be created informally with little effort. Owners of many small businesses
feel that the creation of a corporation is more trouble than it is worth. Furthermore, corporations are often more
susceptible to a plethora of government regulations.
The most obvious problem associated with corporations is the double taxation of income. As noted,
proprietorships and partnerships are not deemed to be entities separate from their owners. Therefore, income is
taxed only one time. Owners pay that tax when the income is earned by their business. For a proprietorship,
Schedule C is an income statement attached to the owner’s individual Form 1040 income tax return to include the
business’s profit or loss. A partnership does file its own return on Form 1065 but that is merely for information
purposes; no income tax is paid. Instead, the various business revenues and expenses are assigned to the partners
for inclusion on their individual tax returns. Any eventual conveyance of this income from business to owner does
not create a second tax.