Fundamental Accounting Principles
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2. (a) Your friend Dick Wasson cannot understand how the characteristic of corporation management is both an
advantage and a disadvantage. Clarify this problem
for Dick.
(b) Identify and explain two other disadvantages of a corporation.
statements?
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Solution Summary
This question involves the fundamentals of accounting
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Advantages
Limited Liability. One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation's debts. The personal assets of shareholders are not at risk for satisfying corporate debts or liabilities.
Corporate Tax Treatment. Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits.
Attractive Investment. The built-in stock structure of a corporation makes it attractive to investors.
Capital Incentive. The stock structure also allows corporations to attract key and talented employees by offering an ownership interest in the form of stock options or stock. ...
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