Extra Listening 1: Corporations
Types, Advantages, Disadvantages & Examples
A corporation is an organization that is considered as a single business separate entity from
its owners. Learn more about the corporate form of organization and its examples, the
advantages and disadvantages of corporations, as well as the differences between S-
corporations and C-corporations.
The Corporate Form of Organization
Meet Tom and Tim. They own a small business that is starting to grow rapidly. However,
they need more money to fund their business. They don't want to take a bank loan. Instead,
they have decided to look for investors. They're also getting a little concerned about being
sued if something happens with the business, and they want protect their personal wealth.
Since Tom and Tim are looking to expand and take on investors, their accountant and
attorney recommend they form a . A corporation is a business (1)____________________
organization that is considered a separate entity from its owners, who are called
shareholders. Tom and Tim will form a corporation by filing (2)____________________ with
the secretary of state for the state in which they want to form the corporation.
As the only shareholders of the corporation, they will have to elect a
who set the policy and vision for the corporation. The board of (3)____________________ directors will also appoint
who run the day-to-day operations of (4)____________________
the corporation. Usually a corporation will have at least a president, a secretary and a
treasurer, although there can be other officers, such as vice presidents.
The board of directors will also approve corporate that govern (5)____________________
the operations of the corporation. Naturally, Tom and Tim elect themselves as the directors
of the corporation and appoint Tom to serve as the company's president and Tim to serve as its secretary and treasurer.
Advantages of Corporations
The corporate form of organization presents some advantages for Tom and Tim. The biggest
advantage for Tom and Tim is the that a corporation provides (6)____________________
for its shareholders. Shareholders of a corporation are not personally liable for the
contractual obligations, debts, negligence or wrongful acts of the corporation. The most
money that a shareholder can lose is his investment in the corporation - the value of his stock.
Another advantage of a corporation is that it can have a (7)____________________, which
means it can outlive Tom and Tim because it is a separate person in the eyes of the law. This
means investors don't have to worry about the untimely demise of the owners. It also
allows the corporation to plan for the long-term. 1
Tom and Tim want investors. One of the great advantages of a corporation is that it's easy to
transfer ownership interests in a corporation. The board of directors can authorize the issue
of shares of stock in exchange for investors' capital infusion into the company. Of course,
Tom and Tim need to be careful and work with their attorney to comply with state and
federal securities law, which governs the offering of stock and other securities to investors.
Disadvantages of Corporations
Tom and Tim do face some disadvantages if they take the plunge and form a corporation. A
corporation is not cheap or simple to operate. Tom and Tim will have to prepare and file
articles of incorporation as well as corporate bylaws. The state also requires the filing of
annual reports. And they have to file corporate income tax returns as well.
They'll have to hold board meetings and annual shareholder meetings. All of this costs
money. Most corporations will retain the services of an attorney and accountant to help
them with drafting legal documents and corporation filings and maintaining compliance
with complex corporation law and regulations.
As already mentioned, corporations have to file corporate tax returns. In fact, unlike other
forms of businesses, corporations are subject to (8)____________________. The
government taxes corporations on their income just like they tax you and me. Moreover,
the government will also tax shareholders on the income they receive from the corporation,
called dividends. Consequently, corporate income is taxed at two levels - at the corporate
level and at the personal taxpayer level. Tom and Tim may take a financial hit from a tax
perspective, but there is a solution. S-Corps vs. C-Corps
Tom and Tim sit down with their accountant to discuss whether to form a C-corporation or
an S-corporation. Their accountant explains that the only difference between a C-
corporation and an S-corporation is the way the IRS treats the corporation for tax purposes.
A C-corporation is subject to double taxation as we discussed. However, if a corporation
qualifies to elect S-corporation status, it is not subject to a double taxation. The income and
losses of an S-corporation flow through the corporation to each shareholder, who reports
his share of the loss or income on his personal tax . (9)____________________
Not every corporation qualifies for S-corporation status. Generally, a corporation can only
elect S-corporation status if it is a corporation, has only the
(10)____________________
type of shareholders allowed under IRS regulations, has no more than 100 shareholders and
has one class of stock. Some corporations, such as insurance companies, are ineligible to
elect S-corporate status. Luckily for Tim and Tom, their corporation is eligible. 2
Extra listening 2: Types of Business Organizations
Advantages & Disadvantages
The best type of business organization depends on the type of business being conducted.
Explore the advantages and disadvantages of a sole proprietorship, partnership, and corporation in this lesson.
Types of Business Organizations
At the age of 18, Alvin invented a widget that changed the way people drive cars. Many
large automobile manufacturers were interested in (1) the widget ____________________
and offered him large, seven-figure contracts. Alvin, who was an expert in automobiles,
knew little about negotiating contracts, running a business and marketing.
He decided to go to his attorney friend and ask him how he should structure his business.
His friend told him there are three main types of business organizations: sole
proprietorship, partnership, and corporation.
For the rest of this lesson, we will explore each type of business organization and explain the
advantages and disadvantages of each. Sole Proprietorship
The definition of sole proprietorship is a business owned by one person, hence the word sole, meaning one and only.
One advantage of a sole proprietorship is that the owner makes all the
(2)____________________. The owner is not obligated to confer with anyone when it
comes to deciding the location of the business, who to hire, what to sell, etc. Another
advantage to an owner of a sole proprietorship is that he or she is the
(3)____________________ of all profits generated by the business. The owner is not legally
bound to share the profits with anyone else.
While there are benefits to being a sole proprietorship, there are also drawbacks. One huge
drawback is if the owner is sued, the owner is held personally liable. Personal
liability means if the person or entity wins the lawsuit, the court can make the owner sell
business and personal assets to satisfy the debt. Another disadvantage of this type of
business organization is that when the owner dies, the business will become defunct or
(4)____________________. Now, let's see if a partnership can remedy some of these disadvantages. Partnership
The attorney explained to Alvin that a partnership might be of interest to him.
A partnershi is a business owned by two or more people. One major advantage of a p partnership is (5)
. Each owner can help with financing, start- ____________________ up
costs, or ongoing business expenses. Another advantage is shared knowledge and 3
experience. In Alvin's case, he's good at making the widget, however, if he had a partner, his
partner may have excellent selling and marketing skills to promote the widget.
However, one main disadvantage is that Alvin would need to share any profit with his
partner. The percentage split would be agreed upon by each partner or may equal a
percentage of what they put in to start the business. This same percentage would be
applied if the business were sued; each partner would be (6) to the ____________________
percentage of ownership. Starting a corporation solves the personal liability issue of a sole proprietor and partnership. Corporation
A corporation is a legal entity owned by shareholder(s). What's interesting about a
corporation is that it can span from only one shareholder owning 100% of the corporation
to the corporation being owned by thousands of shareholders, each defined by their percentage of investment.
Again, one main advantage of a corporation is the limited liability. If the corporation is sued,
the liability is limited to the shareholder's (7) . Alvin's personal ____________________
assets cannot be attached. A corporation also allows for business continuity, meaning
shares can be transferred or purchased by another shareholder in the event of death.
Despite there being many benefits to a corporation, there are also disadvantages. One is
double taxation. If the corporation makes a profit, both the corporation and the shareholder must pay (8)
(if profits are distributed to them). In essence, Alvin, as ____________________
the shareholder, would need to file a personal tax return and the corporation would need to file a separate one.
Another disadvantage is cost. Starting a corporation is expensive, as the entity must be
registered with the state. If the corporation is sued, an attorney must represent the entity. 4