Let the two peers discussion posts below each know if an alternative choice of entity would be possible. What would be the benefits of this new entity choice? Would there be any disadvantages associated with this new entity selection?
1. Discussion Post 1 – by T.C.
There are three different types of business structures which are sole proprietorship, partnership, and cooperation. Sole proprietorship is owned by one owner and does not have a double tax. With sole proprietorship, you would own your own business. A disadvantage is that you are alone. A partnership is exactly what it says, it is a partnership which means that you would have two or more individuals owning a business. There is less of a liability because it isn’t solely on you. A downside to partnership is that you must take into account what the others do and say. You aren’t in total control of the business because you share it with others. Corporation is a legal entity between two stockholders. You have the most protection but you also have no freedom in ownership. I would most likely recommend a corporation structure. Based on what I have seen and researched it would make the most sense because though it isn’t easy to form, the risks are low and the liability protection is high. Corporations also have perpetual existence which means, “Corporations exists as a separate legal structure, almost as if it were a person” (law, 1996). This would be useful because of protection of your assets as the owner.
2. Discussion Post 2 – by M.K.
I would first assess my client’s current status financially and responsibly to identify which options would be practical for them to start their business. If the client is financially stable enough and responsible enough to get through the more challenging startup of the corporation, it is the absolute best option to pursue as it has a ton of benefits. With a corporation they could raise funds by recruiting investors through selling stock in the company which also divides the liabilities and risks of starting the business among all of the shareholders. Aside from the start up difficulty, the taxation is the other negative due to double taxation meaning that both the business and the shareholders are taxed on profits. A benefit of the corporation that can make up for this is that a corporation is considered to be an entity of its own meaning that it can purchase assets such as land in its own name for example. Stemming from the corporation entity is another option which is even slightly better, a LLC which has all of the benefits of the corporation without all of the cons. The only major con is that it is still so new that there are still some gray areas when it comes to governing it. I will not go too far into detail with this option however as it was not something we covered this week. This would be hands down my recommendation to any client that is able to start up a corporation.
I would, however, still explain the sole proprietorship and partnership to the client, but would recommend against it unless there was a circumstance preventing them from utilizing the corporation method. My reasoning behind this would come in the liability part of the discussion. Although these methods are much easier to start up, they are not identified as an entity. This would prevent double taxation, but this is not enough to make them the better option. When considering these options the client needs to be aware that both options leave him/her 100% responsible for any and all liabilities. Also if they or their partner pass away, the business is dissolved in a partnership. All in all, the cons just don’t outweigh the pros to utilizing the corporation approach.
Must use and reference the attached text and reference cited text to:
K Wainwright, S. (Ed.). (2012). Principles of Accounting: Volume I . San Diego, CA: Bridgepoint Education, Inc.