Question

What are the advantages and disadvantages of organizing a firm as a corporation vs. a

partnership?

Answer 1

). Partnership is owned and operated by two or more owners or partners. A corporation is a legal entity, duly incorporated with Articles of Association, with limited liability, can produce and sell products, can incur debts, can sue or be sued. The liability of the shareholders is limited to the value of the shares they hold. The financial liability of the corporation is limited to the value of the assets they hold.

The reasons why partnership firms choose to incorporate is because of:

1. Limited liability of the corporations: The liability of the shareholders is limited to the value of the shares they hold. The financial liability of the corporation is limited to the value of the assets they hold.
2. Life of the entity: Sole proprietorship and partnerships are dependent on their owners – whereas the life of the corporations which can go on indefinitely. Friction among partners may arise which may affect the partnership.
3. Transferability of shares: Shares can be easily transferred by shareholders.
4. Credit: Corporations can easily raise capital in the stock market
5. Income of the entity: Income in the case of sole proprietorship and partnership is divided among the owner or owners, whereas, in the case of incorporated corporations, the income flows into the business.

Advantages of partnership are ease of formation, regulations are few, more partners means more expertise, taxes of the partnership are passed through the income tax returns of the owners like sole proprietorship. Business risk is shared. Business secrets can be safeguarded. Flexibility in business operations. It is suitable for small organizations where the capital needs are not very high.

Formation of corporations are cumbersome and highly regulated. There is double taxation in case of corporations as profits are taxed and income is also taxed separately. Corporations cannot be easily dissolved as the procedures are lengthy and time consuming. Corporations are useful when capital requirement is very large and risk is also very high.