Question

What are the benefits of the corporation in comparison with the partnership and proprietorship structures? How is equity treated and reported differently in this structure?

Answer 1

Benefits of the corporation in comparison with the partnership and proprietorship structures:

1) Corporation can easily raise finance when required by issuing of common stock, preferred stock, bond and other financial instruments. Corporation can access capital market. But partnership and proprietorship firm has very limited financing options ( bank loan and partners contribution ). They can't issue common stock, preferred stock or bonds.

2) Shareholders liability in corporation is limited but in partnership or in proprietorship business liability of the partners or owner's are unlimited. Personal property of share holders in corporation never been take over to pay of company's debts but in partnership or in proprietorship business if firms assets are insufficient to settle firms debts then personal property of the owner are taken over by the creditors.

3) Corporation tax rate is lower than personal income tax rate. Corporation must file taxes separately from shareholder and they pay only corporate tax.Now corporate tax rate is 21%. On the other hand partnership and proprietorship firm has to pay income tax at a regular rates , ranging from 10% to 37%.

4) In corporation entry and exist of any shareholders doesn't effect the other shareholders majorly but in partnership and proprietorship business it's effect is game changing and sometimes it causes dissolution or liquidation of the business

How equity treated and reported differently in corporation structure :

How it is reported ? : In corporation structure equity can be segregated in to common stock, preferred stock and also in retained earnings. It shows total investment made by the owners. Retained earnings track company's income and dividend payment.

How it is treated ?: Equity has been treated as an internal liability of the corporation because as per separate entity concept corporation and it's shareholders are different legal entities and equity is contributed by its owners or shareholders .