Two of the biggest disadvantages of the corporate form of business are government regulation and

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The disadvantages of public corporations vary from complex legal requirements to market fluctuations. 3 min read

1. Disadvantages of Public Corporations
2. Disadvantages of Public Corporations
3. Advantages of Public Corporations

The disadvantages of public corporations vary from complex legal requirements to market fluctuations. Public corporations are business entities that offer their stock to the public on public markets. For example, Amazon, Inc. is a public corporation that anyone can buy shares of. Public corporations are distinct entities that can conduct business, and sue and be sued, in the name of the public corporation, not its individual shareholders.

Many public corporations begin as private corporations with only a few shareholders. They then convert into public corporations, offering their shares to the public to raise more funding or increase awareness of their company. Because of the disadvantages of public corporations, only large enterprises are usually well suited to “go public.”

Disadvantages of Public Corporations

The goal of many new corporations is to become a public corporation with more funding and publicity. However, converting to a public corporation is not the right decision for every business. There are some serious disadvantages of public corporations.

Complex Legal Requirements: Setting up and maintaining a public corporation is much more difficult than setting up and maintaining a private corporation. Public corporations are subject to many legal requirements that do not apply to private corporations. For example, there are rules that govern how shares are allotted.
Increased Governmental Oversight: Public corporations are subject to a high level of government oversight that does not apply to privately held corporations. The level of oversight has increased over the last 10 years in the wake of the many public corporation scandals that caused harm to millions of people. The government regulations, though often necessary, slow down and decrease the flexibility of the operations of public corporations.
Many Company Records are Public: To protect the public and consumers, many of the records of public corporations are required to be open to the public. This means that the public, as well as competitors, may have access to information that company would prefer to keep secret.
Market Fluctuations: One of the biggest disadvantages of public corporations is that they are subject to the whims of the market. Shares of publicly traded companies are bought and sold on a daily basis, and the public corporation cannot control the share prices. As anyone who has ever traded shares knows, the market is not always reasonable.
Dishonest Investors: Day trading shares of public corporations opens up opportunity for dishonest investors to utilize the market for their own gain to the detriment of the public corporation.
Minority Shareholders Lack Protection: Shareholders of public corporations are so numerous that there is very little, if any, protection of the rights of minority shareholders.
Ownership & Management is Split: The ownership and management of public corporations is split. The owners of public corporations are its shareholders who often have no contact with management. Their only significant power is the ability to vote at annual meetings. Managers of public corporations are often outside individuals who receive a salary. These paid managers often lack the incentive to work hard for the company that exists in private corporations where the owners and managers are often the same people.

Advantages of Public Corporations

Of course, public corporations are not all bad news. There are some advantages of public corporations too.

Flexibility & Independence Retained: Public corporations, like private corporations and unlike government agencies, have a lot of control and flexibility regarding company decisions and how the company operates.
Governmental Review Promotes Public Interest: Public corporations are subject to more governmental review and regulation than privately held corporations. This oversight helps ensure that public corporations are operating in the best interests of the public as a whole.
Economies of Scale: Public corporations tend to be large scale operations that benefit from economies of scale. For example, they discount pricing on products because they can buy in bulk. These economies of scale are often passed on to the public in the form of lower prices and improved service quality.
Recruitment Power: Public corporations are usually larger and have more funding than private corporations. They can use this financial power to their advantage by offering better salaries and benefits to potential employees and company managers. This helps public corporations recruit top talent.
Debt Shared by More Investors: Adverse financial circumstances, like debt, are spread across many investors in a public company, so the impact of debt and other company financial hardships on any single investor is much lower than with a private company.

If you have more questions about public corporations or need help forming a corporation, you can post your legal need on UpCounsel’s marketplace. Upcounsel is a marketplace for top attorneys with an average of 14 years of experience. Attorneys on Upcounsel have experience working with, or on behalf of corporations like Google, Menlo Ventures, and Airbnb.

April 29, 2022 April 29, 2022/ Steven Bragg

A corporation is a legal entity, organized under state laws, whose investors purchase shares of stock as evidence of ownership in it. The advantages of the corporation structure are as follows:

Limited liability. The shareholders of a corporation are only liable up to the amount of their investments. The corporate entity shields them from any further liability, so their personal assets are protected. This is a particular advantage when a business routinely takes on large risks for which it could be held liable.
Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds. This is a particular advantage when its shares trade on a stock exchange, where it is easier to buy and sell shares.
Ownership transfers. It is not especially difficult for a shareholder to sell shares in a corporation, though this is more difficult when the entity is privately-held.
Perpetual life. There is no limit to the life of a corporation, since ownership of it can pass through many generations of investors.
Pass through. If the corporation is structured as an S corporation, profits and losses are passed through to the shareholders, so that the corporation does not pay income taxes.

The disadvantages of a corporation are as follows:

Double taxation. Depending on the type of corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
Excessive tax filings. Depending on the kind of corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation, as noted earlier.
Independent management. If there are many investors having no clear majority interest, the management team of a corporation can operate the business without any real oversight from the owners.

A private company has a small group of investors who are unable to sell their shares to the general public. A public company has registered its shares for sale with the Securities and Exchange Commission (SEC), and may also have listed its shares on a stock exchange, where they can be traded by the general public. The requirements of the SEC and the stock exchanges are rigorous, so comparatively few corporations are publicly-held.

April 29, 2022/ Steven Bragg/