Question

Q4. Explain the 8 factors to consider when evaluating various legal structures. You are required to compare 3 legal structures for each factor. Detailed information and discussion is necessary. (1.5 points) (Hint: Please see the additional class notes of Chapter 10 on the student portal)

Answer 1

The following are the eight factors for the selection of legal structure:

· Importance of Capital Resource:

The capital resource is one of the resources which are majorly important and required for any business and if we see 3 types of partnership as discussed above, we can see that in the case of Sole Proprietorship, one person runs the company and is the only owner so his sources are his own personal savings or loan from a bank. On the other hand, in Partnerships, it is easier to get funds arranged as there are more individuals in a firm and everyone is equally responsible. The corporate form of business includes longer planning which allows attracting more lenders to loan large amounts of funds to an organization.

· Presence of a Firm: -

The presence of the firm increases the chance of getting capital and also the death of the owner does not kill the firm.

· Liability of Partnerships: -

A single proprietor is liable for all his business profits and loss and is the only one responsible for debts and this liability extends to personally owned property and his personal savings or loans from bank.

Limited partners are liable only for the amount of their investment to protect from the negative acts of single partner so that money is ensured and they don’t have to bear loss just for a single person.

Corporations have many advantages in this regard. Creditors can force payments of their claims on the corporation only to the level of the agribusiness’s assets. The only exception occurs when the shareholder is also a director or manager.

· Act of Participation in business: -

In managing one business or an organization, many individuals are involved to come and participate together and every individual is best in some are and also specializes a skill in that area which allows for best overall quality of management but because of many brains and talents disagreement will be at a much higher rate which leads to more conflicts and less settlement. Sole Proprietor is only one individual which gets few opportunities because there are no other members to advise or raise funds but in the case of conflict, he sees none as he is the only one to make decisions.

· Management compensation:-

The advantage of the corporation is that when there is a profit it is shared equally with everyone and also gets many benefit programs such as health care and retirement programs.

· Transfer of Management: -

Sole Proprietorship ends when the owner dies, the ownership may be transferred to the next generation or it can come to a complete stop. Corporations and partnerships facilitate the transfer of the business as an ongoing entity. Transfer of management and financial responsibility giving to heirs is to allow them to grow and learn from new experiences on how to manage under the supervision of a more experienced owner.

· Managing Records: -

Sole Proprietorship must have each and every record to defend himself for income tax return. While corporates require a more diverse set of records. While having regular records, it must also have records for every minute of the meetings of shareholders and the board of directors.

· Taxes: -

Sole Proprietor pays tax returns at personal rates as it is more of an individual business. In partnerships, taxable income is transferred to each partner. Incorporations the profits are taxed twice. Firstly, the firm’s profits are taxed. Second, the dividends received by each shareholder are taxed again at personal income-tax rates.

· Comparison (Importance of Capital Resource, Liability of Partnerships, Taxes): -

As discussed above, we can see that each factor is different from each other but also crucial. The business depends on the capital you have and the ability to arrange or acquire more funds when needed which in the case of partnerships, we have seen that partnerships have a more prominent way to acquire funds on a personal level as there are many people in a firm to arrange money, but in Sole Proprietorship all you have is savings. But the legal framework that you use also impacts your tax payments, liability. Taxes for partnerships and corporations charged annually can make a lot of difference. Hence, it makes a crucial discussion and decision for a business to choose an appropriate legal structure. You can also ensure that the legal structure is designed in a way to best impact your business and personal needs.