1sf2pyp4ksro3v4q4a0o - Corporate Finance Assignment March,...

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Page 1 of 17 Corporate Finance March, 2009 Assignment
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Q.1.What are the major advantages and disadvantages of the corporate form of organization as compared to sole proprietorship and partnership? Answer. Corporations enjoy many advantages over partnerships and sole proprietorships. But there are also disadvantages. Advantages: Stockholders are not liable for corporate debts. This is the most important attribute of a corporation. In a sole proprietorship and partnership, the owners are personally responsible for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner's personal bank account, house, etc. to make up the difference. On the other hand, if a corporation runs out of funds, its owners are usually not liable. Note that under certain circumstances, an individual stockholder may be liable for corporate debts. This is sometimes referred to as "piercing the corporate veil." Some of these circumstances include: If a stockholder personally guarantees a debt. If personal funds are intermingled with corporate funds. If a corporation fails to have director and shareholder meetings. If the corporation has minimal capitalization or minimal insurance. If the corporation fails to pay state taxes or otherwise violates state law (like defrauding customers). Self-Employment Tax Savings. Earnings from a sole proprietorship are subject to self-employment taxes, which are currently a combined 15.3% on the first $97,500 of income for tax year 2007. With a corporation, only salaries (and not profits) are subject to such taxes. This can save thousands of dollars per year. For example, if a sole proprietorship earns $80,000, a 15.3% tax would have to be paid on the entire $80,000. Assume that a corporation also earns $80,000, but $40,000 of that amount is paid in salary, and $40,000 is deemed as profit. In this case, the self-employment tax would not be paid on the $40,000 profit. This saves you over $5,000 per year. Continuous life. The life of a corporation, unlike that of a partnership or sole proprietorship, does not expire upon the death of its stockholders, directors, or officers. Easier to raise money. A corporation has many avenues to raise capital. It can Page 2 of 17
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sell shares of stock, and it can create new types of stock, such as preferred stock, with different voting or profit characteristics. Plus, investors are assured that they are not personally liable for corporate debts. Ease of transfer. Ownership interests in a corporation may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses, and permits must be individually transferred, and new bank accounts and tax identification numbers are required. Disadvantages
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This note was uploaded on 05/01/2009 for the course FINC 106 taught by Professor Dr.nehale during the Spring '09 term at Baptist College of Health Sciences.

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1sf2pyp4ksro3v4q4a0o - Corporate Finance Assignment March,...

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