Question

Ann and Jack have been partners for several years. Their? firm, A? & J Tax? Preparation, has been very? successful, as the pair agree on most? business-related questions. One? disagreement, however, concerns the legal form of their business. Ann has tried for the past 2 years to get Jack to agree to incorporate. She believes that there is no downside to incorporating and sees only benefits. Jack strongly? disagrees; he thinks that the business should remain a partnership forever. ? First, take? Ann's side, and explain the positive side to incorporating the business. ? Next, take? Jack's side, and state the advantages to remaining a partnership. ? Lastly, what information would you want if you were asked to make the decision for Ann and? Jack?

Which of the following statements are the advantages of a partnership compared to a? corporation????(Choose all that? apply.)

A.Long life of firm.

B.Ownership is readily transferable.

C.Owners have limited liability.

D.Less expensive to organize.

E.Lower income taxes.

liability comparisons _Merideth Harper has invested? $25,000 in Southwest Development Company. The firm has recently declared bankruptcy and has? $60,000 in unpaid debts. Explain the nature of? payments, if? any, by Ms. Harper in each of the following situations.

a.??Southwest Development Company is a sole proprietorship owned by Ms. Harper.

b.??Southwest Development Company is a? 50-50 partnership of Ms. Harper and Christopher Black.

c.??Southwest Development Company is a

corporation.

a.??If Southwest Development Company is a sole proprietorship owned by Ms.? Harper,:???(Select the best answer? below.)

A.Ms. Harper has unlimited? liability, which means creditors can only claim against the? $25,000 she invested.

B.Ms. Harper has unlimited? liability, which means creditors can claim against her personal assets.

C.Ms. Harper has limited? liability, which guarantees that she cannot lose more than the? $25,000 she invested.

D.Ms. Harper has limited? liability, which is the amount of? $60,000 in unpaid debts.

Your broker calls to offer you the investment opportunity of a? lifetime, the chance to invest in? mortgage-backed securities. The broker explains that these securities are entitled to the principal and interest payments received from a pool of residential mortgages. List some of the questions you would ask your broker to assess the risk of this investment opportunity.

Questions you would ask? include:???(Select the best choice? below.)

A.Percentage of properties in the region that are? "under water"? (homeowners owe more than they? borrowed) or in foreclosure.

B.Will borrowers soon be experiencing an interest rate increase because they took out a mortgage with a low initial rate that was adjustable after a period of?time?

C.Quality of real estate ? (is it in a good? condition, or would there need to be repairs prior to? sale?)                               .

D.What percentage of borrowers are behind on their mortgage? payments?

E.Precedence in bankruptcy? (would other lenders have a senior claim to properties in? bankruptcy?).

F.Creditworthiness of borrowers? (how likely is it that borrowers will lose their job and be unable to make payments on a timely? basis?).

G.Real estate location? (after all, the three most important determinants of real estate price are? "location, location,? location").

H.Type of real estate? (commercial properties offer less liquidity if the market turns? sour, because empty homes can be rented for? revenue).

I.All of the above

Answer 1

Answer: Both forms of business have their own advantages and disadvantages, it depends on the situation and type of business, which form would be more suitable as per the aim and objective of the company.

Ann is positive on the following aspects of incorporating business:

1. Limited liability: Corporate form of business has limited liability of the owners, whereas in normal partnership, it is unlimited partnership except of LLC firms.
2. Easy availability of funds: Corporate form of business finds it easy to raise finance as compared to a partnership form of business.
3. Tax-Benefit: Incorporates, the company can accumulate earnings and can utilise it in future, but accumulated earnings are taxable in partnership.
4. Transfer of ownership is very easy in the corporate form of business, whereas it is difficult to change your ownership in partnership form of business.

Jack has some strong reasons too for defending to Ann’s plan:

1. Taxation: In case of a corporate form of business, the dividends distributed twice, once at the time of distribution and other on the part of earnings. But in partnership the owners get share of profit.
2. Individual income is in the advantage of exemptions, deductions and various tax slabs at individual income level. But corporate tax rates are generally taxed at a higher price.
3. Freedom: Partnership form of organisation enjoy more liberty and freedom to take decisions, whereas in corporate form of business decision making is more troublesome.

Points to be considered at the time of taking decision are:

1. Objective of the Business
2. Nature of the business
3. Capital requirement of the business
4. Limited liability of the business
5. Scale of operations
6. Risk bearing capacity
7. Transfer of ownership

1. Since Ms. Harper has invested in a sole proprietorship company, which is wholly owned by Ms. Harper. Sole proprietor has unlimited liability. Therefore Ms. Harper has the full responsibility of the $60,000 of unpaid debt. She needs to settle down the $60,000 debt.
2. 50-50 partnership with Christopher. Both the partners will have unlimited liability and both of them have to share $30,000 of debt obligation.
3. If southwest is a corporation. Ms harper’s liability will be limited to the amount of investment, she will not be liable for any debt obligation of the company more than the amount invested. In this case she will lose her entire invested amount of $25,000, but she will not be liable for outstanding debt of the company.

If Southwest Development Company is a sole proprietorship owned by Ms.? Harper,:???(Select the best answer

B.Ms. Harper has unlimited liability, which means creditors can claim against her personal assets

I will all the above questions, because all the questions are valid from the point of view of the investor.