This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
There are certain minor disadvantages of the corporate form which may in some cases be of sufficient importance to prevent the adoption of this form. The first and most important is simply the obverse of the advantage of limited liability for the shareholders. Sometimes this advantage involves placing a corresponding limitation on the credit of a corporation. Let us suppose the case of a wealthy man who desires to back a small trading concern. If he becomes a partner in the concern, thus placing behind it his personal resources, it may be presumed that the concern will have all the credit that it can properly use. On the other hand, if he merely takes shares in a corporation, he has no further legal obligation in connection with the business, and his action in some circumstances may even be regarded as indicating a lack of confidence. Undoubtedly the corporate form does lend itself to certain kinds of swindling operations. It has been too common an occurrence for unscrupulous retailers to form a corporation, purchase a stock of goods on credit, dispose of the goods, transfer the money to themselves, and let the corporation go into bankruptcy. Such happenings tend to arouse suspicion, and in some lines of business may lead to undue restriction of the credit of small corporations.
Yet this result is not unavoidable. It is quite possible for any shareholder or any group of shareholders who desire to do so, to put their personal indorsement on the notes of a corporation or to give personal guarantee covering payment of the corporation's accounts. In so doing the shareholders would place themselves in no worse position than if they were to become partners in the business.
The second disadvantage is governmental control. This has already been alluded to in speaking of the reasons why many banking and brokerage houses are not incorporated. Financial corporations are under specially close supervision and limitations on their business.
Most states require all corporations to submit periodical and detailed reports to boards or officials; this causes considerable trouble and expense, but, as necessitating system in keeping corporate records, it is sometimes worth all the labor it entails.
The third minor disadvantage is the expense of organizing a corporation. This expense is always small in proportion to the capitalization. The organization tax, plus the filing and incidental fees, of a $100,000 corporation in New Jersey is $35; in New York $65; in Delaware, $25; in Maine, $67; and in South Dakota, $18. The yearly franchise taxes for a corporation of this size are in New Jersey $100; in New York, $150; in Delaware, $10; in Maine, $10; in South Dakota, nothing. Other expenses, such as lawyers' fees for drawing up the corporation charter, and the like, should not be large. The act of incorporation is nothing more than routine legal business.
In Canada, a Dominion or Federal charter is issued upon payment of a fee of $250 for a capitalization of $200,000, plus 50 cents for every $1,000 additional. There are also license fees to pay to the government of the province in which the company does business, which may amount to $200 to $350 for a corporation capitalized at $200,000. In all other modern countries, the fees and expenses are small unless an attempt is made to procure a special charter instead of operating under the general Incorporation or Companies' Act; in that case the cost may become very high indeed.
A fourth disadvantage that may be mentioned is the fact that the charter and by-laws of a corporation give a certain fixedness to its organization and its powers which may at times prove more or less embarrassing. If these documents, however, are wisely drawn, it is unlikely that there can be any trouble of this nature; if there should be any such trouble, it is nearly always a very easy and simple matter to make such amendments as are called for.
The incorporation under state laws also makes it necessary to procure certificates allowing the corporation to operate in other states than that in which it is incorporated, when this is desired, and this usually involves some expense.
Corporations doing business in more than one state are also liable to be taxed by several states on the same property, while at the same time their shareholders may also be paying taxes on their respective interests in the stock, making a double or treble tax on the same property.
All these disadvantages, it is clear, are for most corporations of slight importance. They have evidently not proved a serious obstacle to the adoption of the corporate form, for this tendency has gone on year by year, increasing in strength so that now it is uncommon for enterprises of any size, with the few exceptions noted above, to be organized in any other form.