Provide short answers on the following: Jimmy Joe Thudpucker and his sister, Lin
ID: 385000 • Letter: P
Question
Provide short answers on the following:
Jimmy Joe Thudpucker and his sister, Linda-Lou Thudpucker are starting a carpet and flooring business here in Winchester. Jimmy will do the installations work and Linda-Lou is great with customer service. Jimmy-Joe Finds out that you are taking BA-303 and wants you to explain the advantages and disadvantages of using either a
(1) Written Partnership Agreement;
(2) LLC;
(3) Limited Partnership, or
(4) Traditional Corporation.
Explain the advantages and disadvantages of these types of business models. Don’t forget to recommend which specific type you think is the best choice for the Thudpuckers’ new business.
Explanation / Answer
The advantages of the four business entity types are listed below
(1) Written (general) Partnership agreement:
Advantages:
- Business entity do not pay income tax. Profits or losses flow down to the individual partners and they pay personal income tax. This way the business does not get taxed separately.
- Partnership is easy to establish.
- Partnership has a greater ability to raise funds, because of multiple owners.
- There is a larger pool of skills, knowledge, and networking due to contacts.
- management is better with the presence of multiple partners, as each can handle different areas, as per their strength.
Disadvantages:
- Partners are jointly and severally liable for other partners' actions and obligations such as torts, contracts and breach of trust. Joint and several liability essentially means that a distressed party can sue any one or more of the partners and does not necessarily sue all of them. If the partner that has been sued but he or she is unable to pay the full amount to the third party, then the other partners have to pay the remaining money to the affected party.
- Each partner shares an individual liability for obligations and debt of business. Personal assets of the partners can be taken by the creditors, in case the business has not enough to pay back their debts
- Any individual partner's interest in the business cannot be transferred without consent of the other partners.
- There is an inherent instability because of the risk of dissolution, in case a partner to withdraw or dies.
(2) Limited Liability Companies
LLCs are a mix of general partnership and corporation, as it has limited liability of corporation as well as tax benefits of partnership.
Advantages:
- Profits and losses directly flow through to the members. Profits are taxed at individual level. So there is no double taxation.
- Members have their liability limited to their share of investment in the business.
- Members can fully participate in management of the business.
- Corporations and partnerships can become members of the LLC.
- There is no limit on the number of members an LLC can have. It can have only one member as well.
- There is more flexibility as members decide how to operate the business vide operating agreement.
Disadvantages:
- The disadvantage is that there more complexity in formation of business entity. For tax purposes, an LLC may be classified as either a sole proprietorship, partnership or corporation.
(3) Limited Partnership:
Advantages:
- Limited partners (LP) have limited liability with of potential lawsuits and debts. and LP is only liable for his or her capital contributed to the limited partnership business. Personal assets of limited partners cannot be seized by a creditor.
- Limited partners can easily find partners/investors because of limited liability of debts.
- Profits and losses of the business directly flow through to partners, just as in case of general partnership. So the business entity is not taxed separately.
- Limited partners share the profits and losses without participating in management and operations of the business.
Disadvantages:
- If a limited partner wants control of the business, then he or she loses the protection of limited liability and the personal liability is applicable as a general partner.
- General partner is personally liable for debts and obligations.
- It involves state filing fees, to file Certificate of Limited Partnership
(4) Traditional corporation or C Corporation
A traditional corporation is a separate entity for purpose of legal aspects and taxation. It is created by shareholders who pool in their money for capital stock.
Advantages:
- Capital is pooled from multiple investors and therefore it is easier to start a larger business.
- Shareholders share the profits and losses, but not the personal liability for debts of the corporation, which means that in case of failure of corporation, shareholders may lose their investments, but they are not held personally liable for debts.
Disadvantages:
- LLC has to file Articles of Incorporation and a filing fee.
- There is double taxation, as profits are taxed at corporate level, as well as profits distributed to shareholders as dividends are separately taxed at individual level.
- Majority shareholders having a larger share in the business have a dominant say in operations and management as compared to minority shareholders.
Considering the above advantages and disadvantages of each business entity type and the requirement of both partners, as they are starting a new business, it is advisable for them to start a with general (written) partnership agreement and expand the business as LP, LLC or Corporation as the need arises in the future for business growth.
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