accounting 3?

Question

Marvin is planning to open a fabric dyeing business. He plans to do large scale dyeing of both fabric bolts and ready-to-wear garments. The source of business will be garment makers and cleaners. He has worked in this part of the fashion industry and knows how much capital he will need to buy the equipment required for this specialized activity.

He has some cash, and he is trying to decide whether to incorporate or to form a partnership. What would you say to him about the major advantages and disadvantages of chartering a corporation rather than forming a partnership?

Answer 1

ADVANTAGES OF THE CORPORATION

* Limitations of the stockholder's liability to a fixed amount of investment. However, do not confuse corporate liability with appropriate liability insurance considerations.
* Ownership is readily transferable.
* Separate legal existence.
* Stability and relative permanence of existence. In the case of illness, death, or other cause for loss of a principal officer or owner, the corporation continues to exist and do business.
* Relative ease of securing capital in large amounts and from many investors. Capital may be acquired through the issuance of various stocks and long term bonds. There is relative ease in securing long term financing from lending institutions by taking advantage of corporate assets and often personal assets of stockholders and principals of guarantors.
* Delegated authroity. Centralized control is secured when owners delegate authority to hired managers, although they are often one and the same.
* The ability of the corporation to draw on the expertise and skills of more than one individual.

DISADVANTAGES OF THE CORPORATION

* Activities limited by the charter and by various laws. However, some states do allow very broad charters.
* Manipulation. Minority stockholders are sometimes exploited.
* Extensive government regulations and required local, state, and federal reports.
* Less incentive if manager does not share in profits.
* Expense of forming a corporation.
* Double tax - income tax on corporate net income and on individual salary and dividends.

ADVANTAGES OF A PARTNERSHIP

* Ease of formation. Legal informalities and expenses are few compared with the requirements for creation of a corporation.
* Direct rewards. Partners are motivated to apply their best abilities by direct sharing of the profits.
* Growth and performance facilitated. In a partnership, it is often possible to obtain more capital and a better range of skills than in a sole proprietorship.
* Flexibility. A partnership may be relatively more flexible in the decision making process than in a corporation. But, it may be less so than in a sole proprietorship.
* Relative freedom from government control and special taxation.

DISADVANTAGES OF A PARTNERSHIP

* Unlimited liability of at least one partner.
* Unstable life. Elimination of any partner constitutes automatic dissolution of partnership. However, operation of the business can continue based on the right of survivorship and possible creation of a new partnership. Partnership insurance might be considered.
* Relative difficulty in obtaining large sums of capital. This is particularly true of long term financing when compared to a corporation. However, by using individual partners' assets, opportunities are probably greater than in a proprietorship.
* Firm bound by the acts of just one partner as agent.
* Difficulty of disposing of partnership interest. The buying out of a partner may be difficult unless specifically arranged for in the written agreement.