1. What is the most important difference between a corporation and all other org
ID: 2807767 • Letter: 1
Question
1. What is the most important difference between a corporation and all other organizational forms? 2. What does the phrase limited liability mean in a corporate context? 3. Which organizational forms give their owners limited liability? 4. What are the main advantages and disadvantages of organizing a firm as a corporation? 5. Explain the difference between an S corporation and a C corporation. 6. You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid? 7. Repeat Problem 6 assuming the corporation is an S corporation.
Explanation / Answer
The four major types of company ownership or organizational forms are Corporation, Sole Proprietorship, Limited Liability Company(LLC) and Partnership.
(1) The major difference between a corporation and the other three types of onwership is that a corporation is considered as an individual legal entity. This essentially guarantees limited liability (which is actually restricted to the shareholder's investment in the corporation) to corporation shareholders and managers in case the business fails. A corproration is also considered to be a going concern unless otherwise specifically stated. However, one disadvantage of a corporation is that it is subjected to double taxation, once at the corporation tax rates and again at the personal tax rate on the corporation's dividend earners.
(2) The Limited Liability phrase most often used for LLC's in the corporate context means that in case of business failure or forced liquidation owing to unsustainability of the business, the LLC's shareholder's, managers and other professionals related to the LLC have liabilities limited only to their investment in the LLC. Additionally, the LLC is taxed like a sole proprietorship or a simple partnership (at the individual level) such that it attracts only personal income tax and not corporation tax.
(3) Organizational forms that ensure limited are LLC's, Corporations, Limited Partnerships,Limited Liability Partnerships and Limited Liability Limited Partnerships.
(4) The advantages of organizing as a corporation include limited liability,easily transferable ownership, going concern,separate legal entity ease of raising capital and possible tax holidays and advantaged for an incorporated entity. Three major disadvantages of a corporation are lack of decisional felxibility as all major decisions need to be vetted by shareholder's and the board of directors, higher regulatory scrutiny and consequently greater regulatory expenses and double taxation at corporation and personal level.
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