Question

List the advantages and disadvantages of a partnerships and corporations?

Answer 1

Solution:-

Advantages of a partnership include that:

• two heads (or more) are better than one
• your business is easy to establish and start-up costs are low
• more capital is available for the business
• you’ll have greater borrowing capacity
• high-calibre employees can be made partners
• there is opportunity for income splitting, an advantage of particular importance due to resultant tax savings
• partners’ business affairs are private
• there is limited external regulation
• it’s easy to change your legal structure later if circumstances change.

Disadvantages of a partnership include that:

• the liability of the partners for the debts of the business is unlimited
• each partner is ‘jointly and severally’ liable for the partnership’s debts; that is, each partner is liable for their share of the partnership debts as well as being liable for all the debts
• there is a risk of disagreements and friction among partners and management
• each partner is an agent of the partnership and is liable for actions by other partners
• if partners join or leave, you will probably have to value all the partnership assets and this can be costly.

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.

• Source of capital. A publicly-held corporation in particular can raise substantial amounts by selling shares or issuing bonds.

• 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.

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