Question

Dr. Smith and his wife are both medical doctors and they just completed their medical residence at a local hospital. While attending your graduation party, Dr. Smith and his wife learned that you just earned your MBA. The Smiths approached you for advice on the legal form of business they should elect for their medical practice they are planning to open. The Smiths are interested in understanding each form of business organization and advantages and disadvantages of each form.

In advising the Smiths, please address the following questions:

1.         Compare and contrast

a.         the forms of business organizations, advantages, and disadvantages.

b.         general partner vs. limited partner?

c.         limited liability partnership vs. a limited liability company?

2.         Explain the advantages and disadvantages of organizing a business as an “S-Corporation?”

3.         Explain if the form of business organization impact the control of the firm and ethical behavior.

Based on your discussion, explain which form of business organization you would advise the Smiths to elect. Defend your response.

Answer 1

1a. There are 4 main form of business organizations

• Sole proprietorship : This kind of business is owned by 1 person. Both Smith and his wife can open their own business. Main advantage is that the owwer makes all the decisions and no interference is there. Major disadvantage is that the owner is personally liable for all the losses and Legal suit cases if any.
• Partnership: Dr Smith and his wife can open the business in partnership and decide the % of the business they would like to keep and contribute accordingly. Advantage: Risks and costs are equally shared and expert opinion of his wife shall always be there. Disadvantage: The two partners may disagree on the opertaional decisions of the company which may lead to personal rift between the partners
• Corporations: Corporations provide some of the best protection to the personal assets because Smith and his wife are not personally laible for any corporate debts or lawsuits.Major disadvantage is lot many regulatory documents need to be submitted to the government on timely basis
• Limited liabilty company : is a business entity that combines some characteristics of a corporation and a partnership. An LLC protects your personal assets from creditors and lawsuits, and you have the option to be taxed as a sole proprietorship, partnership or corporation depending on you set up the business. Major disadvantage is that it cannot have shareholders.

1.b With a general partnership you are personally liable for debts and lawsuits whereas in limited partnership, personal assets are protected

1.c Limited liability partnership needs to have atleast one managing partner and the managing partner is exposed to all liabilities. In limited liability corporation the business can be managed by the owner or people can be hired. Advantage of LLC over LLP is that LLC can have as many members as they like and corporations are allowed to be members

2. Advantage of organizing the business as S-Corporation is that the profits are taxed on the shareholders personal tax returns and disadvantage is that it cannot have more than 100 shareholders

3 Form of business organization does not impact the control of the firm and ethical behavior. it is dependant on the founder of the business

I would advise S Corporation as the profits shall be taxed as per personal tax rate. Also the personal assets shall be safe against any claim in the future