Question

Kerry Donovan plans on opening Donovan’s Fashion Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Kerry wants the option to raise additional equity easily in the future.

Requirements:

Which type of business organization will meet Kerry’s needs best? Give arguments to support your answer.

Name two other types of business organization and explain each.

Answer 1

Kerry wants a business organization which give her business unlimited life but limited liability feature. Such an arrangement is best possible in case of organizing a private limited company i.e. C corporation. UNder C corporation the company will be separate legal entity in the eyes of the law and therefore all the liabilities of the company will limited to the stockholder's only upto the amount of shares held by them. Stockholder's will not be responsible for any excess liability. This will help Kerry in meeting limited liability feature of organization.

A private limited company is assumed to undergo for foreseeable future i.e it is assumed that a company will continue it's business for unlimited future period and will not wind up in the normal course of business of the company. Accordingly, by organizing a private limited company, Kerry's unlimited life criteria will also get fulfilled.

Moreover, to raise additional equity wiith ease, Kerry in future can opt to raise money by listing on a stock exchange. By listing on a stock exchange, the stock of Kerry will trade in open market and investors will purchase equity in the company by investing their money. This way future cash needs will also get fulfilled.

Two other types of business organizations:

1. S Corp - S corporation is type of company only but with the difference that all the income of S corp is not taxable in the hands of the company rather income is first passed on to the stockhokder's and then taxed in their hands. However, stocks of S corp cannot be listed on a stock exchange and therefore are not open to all the people.

2. Partnership - A partnership is an unincorporated body in which two or more persons form an organization to share the profits & losses of business in a specified ratio. All the partners contribute some capital in the business for becoming partners and share profits.