Question

Barbara Beck and Joan Bishop are thinking about opening a new restaurant. Ms. Bishop has extensive marketing experience but does not know that much about food preparation. However, Ms. Beck is an excellent chef. While both will actively work in the business, Ms. Bishop will provide most of the funds necessary to start the business. At this time, they cannot decide whether to operate the business as a partnership or a corporation. Required: 1) What are two main advantages of forming a corporation? What is the biggest disadvantage? Explain your answers; use sentences, not a list. Cite all sources used. 2) What are two main advantages of forming a partnership? What is the biggest disadvantage? Explain your answers; use sentences, not a list. Cite all sources used. 3) Which type of organization would your recommend for Ms. Beck and Ms. Bishop? Write three or four sentences explaining why they should follow your advice. Be sure to mention the specifics of their case in your arguments.

Answer 1

1)Corporation

Advantages

• Limited Liability i.e. the investors are liable only upto the amount they have invested.Their personal assets are not involved for repayment of any liability
• Perpetual life i.e. a corporation entity has unlimited life Since ownership of such entity can pass through many generations

Disadvantage ​​​​​ Double taxation i.e. entity pay taxes on its income and afterwards shareholders also have to pay tax on dividend earned.

2)Partnership

Advantages

• Quick decision making since not many people are involved and concept of passing of resolutions is not there.
• Easy to start -​​​​​​-The only requirement is a partnership deed.

Disadvantage-Unlimited liability i.e. every partner is personally liable for the partnership firm's losses.

3)I would recommend Corporation(Limited liability Corporation) for Ms. Bishop and Ms. Beck because:-

• They would not have to include their personal assets if they opt for LLC to repay loans and other liabilities.Eg.if any customer suffers from food allergy he can't claim personal assets.
• LLC's don't require board of directors and other managerial formalities. They are simple and flexible.
• An LLC's profits can be taxed as a corporate entity or they can avoid paying taxes on both corporate's profits and their personal income.
• Moreover initial funds can be raised from shareholders instead of taking loan or Investing huge amount from personal property.