Question

The client was a young IT professional who wanted to start-up a new company. The idea was to combine virtual reality developments with online education which was getting quite popular after coronavirus pandemic in 2020. Furthermore, the client was getting ready to launch virtual offices as well. Test runs have shown a strong interest from many companies as this would allow to save a lot of money on office spaces, utilities and supplies.

you have also asked the client which criteria is the most important for the new company: (a) organizational requirements and costs, (b) liability of the owners, (c) the continuity of the business, (d) the transferability of ownership, (e) management control and regulations, (f) the ability to raise capital or (g) income taxes.

Question . Specify the most suited legal form of business for each above mentioned criterion and explain the reason. Answer: a, b, c, d, e, f, and g

Answer 1

Introduction:

The legal form of business includes sole proprietorship, General partnership, Limited liability partnership, corporations etc. Each of these legal forms of business have their advantages and disadvantages. So, it is very important for the businessman to opt for right legal form based on his requirements.

Main Answer:

A. Organizational requirements & costs : Sole Proprietorship.

Reason- Sole Proprietorship is very simple type of business structure which can be created INFORMALLY so, there are no organizational requirements. Even a single individual can start the business without any formal registration. no approval from Federal and state government is required.there is NO COST of filling the incorporation statement with the authorities.

B. Liability of the owners: Corporation or Limited liability partnership.

Reason- in both above form of business structure the liabilities of the oweners are LIMITED upto the investment made by them. They are not liable to discharge liability by selling of their personal assets.

C. The continuity of the business: Corporation.

Reason- the bankpacy or death of the oweners don't cause corporation to discontinue it's operations. So, it can be said that corporation is independent of the oweners life and death. That why it is said that corporations have perpetual life.

D. Transferability of ownership: Corporation.

Reason- the ownership of the corporation is very easy to transfer by selling the share at stock exchange like new york stock exchange. There are no restrictions on the transfer of the ownership of the corporation.the shareholders don't require to take approval for selling their ownership from either management or fellow shareholders.

E. Management Control & Regulations: General & Limited Partnership.

Reason- in both above forms management control is vested in hands of owners instead of corporations in which ownership is separate from management. In comparison with the corporation, there are less regulations are implied on the partnership. Corporations also have to follow the regulations issued by Security Exchange Commission and provisions of Model Business Corporations Act etc All these regulations are not implied to partnership.

F. Ability to raise capital: Corporation

Reason- Corporation can issue shares to general public to raise capital by following Security Exchange Commission's guidelines. Corporations can access to huge public funding by giving shareholders ownership rights. The corporation can also issue bonds which is form of borrowing without giving ownership rights to the bondholders.

G. Income Taxes - Partnership.

Reason- As per taxation partnership is flow through entity which means Partnership is not required to pay income taxes but partners on their individual capacity have to pay taxes on the income earned in the partnership which different from corporations. Corporations have to pay income tax at applicable rate and dividend distribution to shareholders is also subject to income taxes with some exemptions. So, corporation's income taxed twice subject to exemptions.