Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 11 - Reporting and Analyzing Stockholders' Equity - Questions: 2

Answer

Step 1 Corporation management : It is advantageous to the corporation as it will give professional managers. The professional managers, looks after the day to days affairs of the company more efficiently. Board of Directors monitors the Manger's actions more closely. Step 2 The two other disadvantages of a corporation are - Government Regulations - A Corporation is subject to various state and federal laws. The laws are different from state to state. For sale of common stock, different states have different rules and the corporation has to ensure that these rules are followed. Publicly held corporations are required to make extensive disclosure of their financial affairs to Securities and Exchange Commission.

Work Step by Step

step 1 Corporation management is disadvantageous also, as it separates the owners and managers. The professional managers are employees of the company and cannot have the same amount of loyalty as of the owners. We have so many cases where the managers give more importance to their personal interest than the interest of the company. step 2 Additional Taxes :- Proprietorship and partnership are required to report their Income in their personal income tax returns. However, in case of corporation, since it is a separate legal entity, it has to report the income in the income tax return of the corporation. The income tax of corporation is calculated and paid by the corporation. After making the payment of income tax, remaining income is available for distribution among the stockholders, as dividend. On receipt of a share of income from the corporation, the stock holder will be required to pay income tax on this receipt of dividend. Hence there is double taxation, once on the corporation, and then again on the stockholders.
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