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Chapter 7.1® - Assets, Liabilities & Shareholder's Equity Introduction - Advantages & Disadvantages of Shareholder's Equity - Taxation & Control Issues, Limited Liability, Capital Accumulation & Transfer of Shares/Ownership

The definition of Shareholder's equity is the difference between the assets and the liabilities of an entity is called ‘Shareholder’s Equity’. The term ‘Equity’ is a very important meaning in it. The way we describe in a simplest form is ‘there is no asset, no equity’. If you remember the accounting equation that we all have studied that “Assets – Liabilities = Equities”. Also, we all know the abbreviation, ALPER, which makes easier to remember the foundation of accounting. ALPER stands for:

A = Assets

L= Liabilities

P= Proprietorship / Equity

E= Expenses

R= Revenue

All the above mentioned are the pillars of the accounting. And ‘equity’ is among one of them.

Advantages & Disadvantages:

The corporate entity has advantages and disadvantages as compared to sole proprietor or partnership entities. Now, lets take a look advantages first:

Limited Liability

In the corporate entity world, every shareholder has a limited liability as per the ratio of shares. In the event of dissolution or insolvency, the shareholders loose their amount invested only. The creditors of the corporation has no authority to challenge the personal assets of the shareholders. But, creditors might ask for personal guarantees against the loans and other financial arrangements from each shareholder or a director.

Capital Accumulation

The corporate entities may have an option of capital accumulation. In this event, the companies may invest the funds in the large portfolios to maintain the company’s cash flows and demands for upgradations as per the needs. Most of the companies invest in the open market and big chip companies so that they can earn good profits which reduces their demand to obtain the loans from the financial institutions.

Transfer of Shares / Ownership

The share capital can be transferred after following the corporate requirement. This is the most attractive part in the corporate environment where you can transfer your ownership.

Issue of shares

A very interesting attitude of the corporate companies is to issue shares to the public where public becomes a part of the management as per the ratio of theor investments. It gives an opportunity to a company to expands their productivity and meet the demand / supply demands.

Voting Rights

All the shareholders have right to vote. They can select the CEO and directors by doing a voting. This gives every body an independence to select their CEO or directors.

Now lets talk about the disadvantages of the corporate forms whereas:

Higher Taxation:

The corporate entities pay tax on the profits or equity and shareholders pay tax on the dividends which they get from the corporate entity. So, here, if you think, a shareholder is absorbing a burden of double-taxation. However, in the case of private corporation, CCPC (Canadian controlled private corporations, get lower tax rate which is good in compare to the corporate entities. But the private companies have to proof that they qualify for the reduced tax rules. Otherwise, the the combined effect of corporate tax and individual tax will exceed the rate of the tax bracket that would be assessed to the owners of sole proprietors or partnerships.

In the event where entity incurs losses, a sole proprietor or a partner may claim those losses which offset with their income. But in corporate world, the losses may be accumulated and carry forward until they are completely utilized. So, in the corporate entities, no immediate tax benefit.

Controlling issues

This is the hurdle if a large number of shares have been bought by a family or a group. Why is that? The reason is very simple. The more shares of the corporation you possess, more influence you have. So, if the major shares of the company is with a specific group, this will increase the influence of the group of people and will affect the decision of the corporate matters.

Financial & Legal Costs:

The financial and legal costs are always higher for the corporations in comparing with the partnership and sole proprietorship entities.

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