Question

Mark Giltrow and Denise Chan are forming a business to imprint​ T-shirts. Giltrow suggests that they organize as a partnership in order to avoid the unlimited liability of a proprietorship. According to​ Giltrow, partnerships are not very risky.

      Giltrow explains to Chan that if the business does not​ succeed, each partner can withdraw from the​ business, taking the same assets that she or he invested at its beginning. Giltrow states that the main disadvantage of the partnership form of organization is double​ taxation: First, the partnership pays a business income​ tax; second, each partner also pays a personal income tax on her or his share of the​ business's profits.

Correct the errors in​ Giltrow's explanation.

1. A partner has

▼

personal liability for the obligations of the partnership. Therefore partnerships are

▼

not risky

risky

for a partner.2. A partner

▼

can

cannot

take from the business the same assets that he or she invested at the beginning. 3. Partnerships

▼

don't pay

pay

business income tax.

Answer 1

Mark Giltrow and Denise Chan are partners. They form a partnership firm to imprint T-Shirt.

1. A partner has personal liability for the obligations of the partnership. Therefore partnerships are not risky.

Explanation

Partnership is not risky in compare to sole proprietorship because in partnership all debts are divided among partners in agreed ratio. No single partner is responsible for business operations. Because all decisions in partnership are taken by agreement of all partners.

But in sole proprietorship all debts are bear by only the sole proprietor who owns the business.

2. A partner cannot take from the business the same assets that he or she invested at the beginning.

Explanation

Partners can't take from the business the same asstes that is invested at the beginning. Because partners are personally responsible for all debts and any liabilities arise from business operations. If in any case business does not succeed then all assets are sold out and from liabilities are paid out and remaining portion is divided among partners in agreed ratio.

3. Partnerships  don't pay business income tax.

Explanation

In partnership the partners manages and control the business, and all earning from it flows directly through the business to the partners, who are then taxed based on their portion of the income. Partners pay personal income taxes on their business profits.

Thus, profits get taxed only once { No double taxation} by the personal income tax. Partners don't pay business income tax.