Question

Write a response to the following in a minimum of 500 words:

Choosing the form of business to create is one of the most important decisions an enterprise makes. The extent of liability and control the owner will have depends on the form of the business.

Differentiate among the major forms of business organization and describe what you consider to be the top 2 advantages and disadvantages of each form. Address the regulatory and financial statement differences of each form of business.

Answer 1

Sole Proprietorship

Sole proprietorship is a type of business which has only one owner. Although accounting has a separate entity principle, under the law, the owner and the business are treated as one and the same, meaning, suing the business means suing the owner. They do not have a separate judicial personalities.

Advantages:

• Easiest to form compared to other forms of business organization.
• Complete control
• Least government requirements since most sole proprietorship are small in capitalization and operation.
• Profit become part of the owner's taxable income and is taxed once on the owner's personal tax return. Normally, individual tax rates is lesser than a corporate tax rate.

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Disadvantages

• Least capital to be accumulated since there is only one owner.
• Less skills to manage and oversee the business since there is only one owner.
• As previously mentioned, the business and the proprietor is treated as one and the same by the law, hence, the proprietor can be subjected to unlimited legal liabilities in connection to the business.

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Partnership

A partnership arises when two or more persons bind themselves to contribute something for the purpose of obtaining profit or practicing profession. The partnership has its own juridical personality and treated as a different person from its partners, hence, a suit against the partnership does not necessarily mean a suit against the partners. In accounting, the biggest change is that there will be more than one capital account. Also, there must be an agreement to be followed with regards to admission, withdrawal, retirement, division of profits and liquidation.

Basically, a partnership can be formed even through verbal agreement but there are few exemptions in the law where an Articles of Partnership is required to be submitted. Also, general partnership, those which are considered for business and not for practice of profession are normally taxed like a corporation.

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Advantages:

• Higher capital than sole proprietorship since there is more than one person contributing to the business
• More skills and talents to run the business
• Limited partnership offers and limited liability partnership offer partners a degree of liability protection for partners

Disadvantages

• Partnerships except LLP requires to have atleast one partner o to be generally liability (with unlimited liability)
• can be easily dissolved since ownership interest is not transferrable as partnership is based on delectus personae.

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Corporation

Corporation is a legal entity created by operation of law with rights, powers and attributes provided by the law. A corporation can have as much stockholders as it needs to raise its authorized capital. Because of this, not all owners of capital stock can manage the corporation and therefor they vote for a set of board of directors and officers who will manage and supervise the operation of a corporation.

Hence, they have separate legal personality and powers expressly authorized by law and incident to its existence, they are required to acquire first the consent of the state before they operate and they are required to submit an Article of Incorporation with endorsement from the department to which their specific industry will fall under its chapter(example, banks will be under central bank, hospitals under department of health). This is just the most important requirement among a lot of other papers required by the government to grant its existence.

Accounting wise, it has a big difference compared the two with it comes to equity portion. It has common stock account for the par value of its issued stocks, share premium for payment of stockholders in excess of its par value and retained earnings where income(and losses) are accumulated and to which dividends are deducted.

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Advantages

• Unlimited life span since shares can be transferred, sold or donated.
• Limited liability of stockholders as the liability of the corporation is not a liability of the stockholders
• Easiest among the three to raise capital

Disadvantages

• Expensive and difficult to set-up
• Subject to double taxation as profit of the corporation and the dividends it distributes to the stockholders are both subjected to income tax
• Subject to periodic filings and stricter regulations