DISADVANTAGES OF COMPANY
The disadvantages of the company are as follows:
The income of the company is dually taxed, first as an income of the company and second as the income of the shareholders. The company has also to pay corporate tax which is imposed on its form. Furthermore, state and provincial taxes are also levied on it. Special taxes are also imposed on certain businesses, such as utility, railroad, insurance, and banking corporations. Sole proprietorship and partnerships are exempt from most of such taxes.
A great cost is incurred in the formation of the company. A corporation has to pay registration fee. It has to pay a legal fee to its legal advisors who prepare memorandum and articles of association. Cost also incurs in the publication of prospectus in the newspapers. Promoters’ fee is another expenditure which must be paid. Printing of share certificates is still another cost.
Government Restrictions And Reports
All corporations are subject to the approval of the government, which imposes certain restrictions and exercises some controls over them. They have to pay registration fees to the government. They must submit annual financial statements to the registrar. It also imposes certain taxes on this form of business. They must obtain from the government registration and commence certificates.
Lack Of Secrecy
Business and financial secrecy cannot be maintained in the company. Every year thousands of copies of financial annual statements are to be distributed to the company shareholders explaining the company’s financial and profit position. These statements are also sent to the registrar, bankers, and stock exchanges of the country. Due to this wide distribution of business information, secrecy is impossible. This disclosure of valuable information can be useful for rival companies. In sole proprietorship and partnership maintenance of secrecy is no problem.
Lack Of Credit Standing
Unlike sole proprietorship and partnership the company does not enjoy a high credit standing as the creditor knows that his loan can only he recovered from the business assets of the company. The personal property of the shareholder cannot be utilized if the company assets fall short in the settlement of debts. If the company runs into bankruptcy it is the creditor who will suffer because they will not be paid in full. Conversely, sole proprietorship and partnership provide double protection to the creditors. These forms of ownerships not only put their business assets on the disposal of their creditors in the settlement of their debts but also offer their owners’ personal property if business assets are insufficient. So the creditors have double security against their loans. Hence their credit standing is extremely high. The company lags behind in this regard.
Lack Of Personal Interest
The administration of the company is not in the hands of shareholders. Ii is run by employees who are dilly interested to the extent of their assigned tasks to justify their salaries. Profits or losses of the company usually do not affect the status of employees. Therefore, they lack in the interest for the welfare of the company. Employees are usually indifferent as to the general welfare, growth, and progress of the company.
The Charter Restrictions
The corporation faces charter restrictions imposed by the government. The name, capital, objectives domicile, and the liability of the corporation all have to be registered with the government and cannot easily he changed afterwards. In other words, the memorandum of association once registered with the registrar cannot be altered without prior permission of shareholders, civil court of law, and the registrar of companies. Such a change requires a long and tedious procedure involving excessive time, labor, paper work, and cost.
Difficulty In Formation
Establishing a company is quite difficult and requires many formalities to be met unlike sole proprietorship or partnership that can be formed fairly easily without undergoing any difficulty arising out of government restrictions and substantial legal requirements.
To establish a company requires preparation of many documents like memorandum of association, articles of association, and prospectus that should be published in the newspapers for inviting shares from the public. Then, these documents along with the fee must be submitted with the registrar of the company. The company does not come into being merely by submitting the required documents. The registrar, on the receipt of these required papers will go through them for scrutiny. After finding them in place he will issue a certificate known as certificate of registration. On the issuance of this certificate company comes into existence, but still a public company cannot start its actual operation. It will have to wait for another document known as certificate of commencement issued by the registrar on the receipt of which the company becomes eligible to start its actual business. As for a private company, it can start its business immediately after obtaining only registration certificate.
Such formalities and requirements have nothing to do with the sole proprietorship and partnership. You just decide on them and they come into being.
Difficulty In Liquidation
It is not easy to put an end to the life of the company. To end a company many steps will have to be taken and legal requirements fulfilled. If boards of directors want to liquidate their company they will have to get a special resolution passed with a two-thirds majority of the shareholders. Having passed the resolution the company will have to file a petition to the court. Finally the company will have to approach the registrar of the companies for the liquidation.
On the other hand, sole proprietorship and partnership forms of business organizations can be dissolved easily at the discretion of’ the owner or partners without undergoing harsh formalities.