Advantages and Disadvantages of Incorporating a Company

Part A
To: Jack Smith
Date: ________
Dear Jack,
This letter is written regarding your visit to our office. You are considering establishing a small
business in fashion industry, particularly dealing in men's clothing. As a result, you were looking
for advice regarding the formation of the most suitable business structure for operating this new
venture. By starting a new business in Australia, a number of options are available regarding the
business structure. As a result of business can be operated as a sole trader, partnership, company
or a joint venture. All these business structures have their own advantages and disadvantages.
Under these circumstances, it becomes important to be aware of all the relevant factors so that
the most appropriate business strategy can be selected for starting the new venture. Here it
appears that the business center of a company with the most appropriate for starting your new
venture (Clarke and Clarke, 2016). It needs to be noted that, as is the case with all the business
structures, the business sector of a corporation also has its own advantages and disadvantages.
However, after going through all the relevant factors, it appears that in the present case, the
business structure of corporation will be the most appropriate for starting the new venture
(Khoury and Yamouni, 2010). Hence, the advantages and disadvantages related with business

structure of corporation had been discussed below so that you can make an informed decision.
Even if there are some disadvantages also in the business structure of a corporation, but the
advantages that are going to be available after the incorporation of a company outweigh the
disadvantages.
The advantages of incorporating a company:
Limited liability: the most significant advantage that is available after the incorporation of
companies that of limited liability. Therefore as compared to a sole trader or partnership, where
the owner of the business is lawfully accountable for different facets of business including its
debts and liabilities, in case of a company which is treated as a separate legal entity, the liability
of the owners of the company is limited. Therefore, while the owners of sole trader business or
partnership business can be considered as liable for selling a defective product or an injury
caused to the consumers in the course of business, the owners of the business can be held
personally liable (Dunncliff, 1990). Under these circumstances, the personal assets of the owners
of the business can also be at risk. This is not the case with the company. In view of the principle
of distinct identity of a company (Solomon v Solomon, 1897), the personal assets of the owners
of the business are not at risk.
As a result of the limited liability of an incorporated company, the company can be forced to pay
the creditors only out of the assets over by the company itself along with any money unpaid on
the shares of the company. Moreover, the company is considered as a distinct legal entity or a
legal person (Terry, Giugni and Brace, 1994). Therefore, the company is distinct from its owners
(shareholders) and the persons controlling the company (Directors). In this way, generally

speaking, and by assuming that the directors of the corporation have acted honestly and fulfill
their duties, particularly the directors have not allowed the company to trade while it is insolvent,
and when the owners/directors of the corporation did not provide a individual guarantee
regarding the debts of the corporation,. In such a case, the private assets of the
shareholders/directors of the company are beyond the reach of the creditors of the company and
industry they are protected from them.
Owning Property in its Own Name. Due to many reasons sometimes it is suitable for the persons
that the property should be owned at the deal should be made in the name of the corporation in
place of their own name. At the same time, the company now in Australia now allows for the
formation of a one-person company. This means the company having a single person as the sole
owner (shareholder) and the director of the company. However, it always needs to be
remembered that a company is an entity that is disconnected from its owners and directors.
Therefore, the company should not be considered as an alter ego of its owners.
Impression created on outsiders: generally the outsiders are impressed by the name of an
incorporated company instead of merely a registered business name. The reason could be that the
other people are aware of the fact that the cost of establishing a company is known as compared
to the registration of a business name. In this way, the impression of more seriousness is created
in case of the registration of company in Australia.
Tax: the individuals who are doing business under registered business name are required to pay
tax at standard rate. On the other hand, the corporations in Australia have to pay tax at a fixed
rate of 30%.

Perpetual succession: another advantage available in case of the incorporation of companies that
of perpetual succession. The law provides that unless a company is bound up, the corporation
carries on even if the members have left the company.
However, the presence of a large number of advantages does not mean that there are no
disadvantages associated with a Corporation. Therefore the disadvantages associated with the
company can be described as follows:
The establishment of a company can be more expensive as compared to the establishment of a
sole trader or partnership. Similarly, it is costly to maintain and wind up a company as compared
to the business structures. Therefore the initial cost of registration of a company is more than the
cost of setting up a sole trader or partnership. However it needs to be noted that the benefits
available in case of company outweigh the higher initial cost of incorporated.
The reporting requirements are also complex. The corporations law has imposed a number of
reporting requirements on the companies. It is the duty of the directors to ensure that all the
reporting requirements are fulfilled by the company.
In case, the directors of the company failed to fulfill the legal obligations imposed on them by
the law, they can be held personally liable regarding the debts of the company. At the same time,
certain duties have been imposed on the directors by the common law and the statutory law.
These duties have been imposed on the directors by the Corporations Act.
The profit made by the company that is going to be distributed among the shareholders is
taxable.