Chapter 12, Problem 1DQ

To determine

Explain the main advantages of:

1. (a) Proprietorship.
2. (b) Partnership.
3. (c) Limited Liability Company.

Explanation of Solution

Proprietorships: Proprietorship is a form of organization, which is owned, and controlled by an individual called the proprietor. The owners’ liability is unlimited. The most common proprietors are lawyers, physician, a small business owner and more.

Partnership: It is that form of organization which is owned and managed by two or more persons who invest and share the profits and losses according to a pre-determined ratio. The partners are jointly and severally liable for all the debts and obligations of the business.

Limited Liability Company: It is that form of organization which is formed as a legal entity with state charter that provides limited liability to the owners. It has a common seal.

(a)  The main advantages of Proprietorships are:

Easy of formation: It is easy for forming this type of entity.

Non-taxable entity: This entity is not taxed for federal income tax purposes.

(b)  The main advantages of Partnership are:

Expertise can be pooled: Expertise from different field can be pooled in as required for a business under partnership.

Non-taxable entity: This entity is not taxed for federal income tax purposes.

(c)  The main advantages of Limited Liability Company are:

Legal entity: A limited liability company has a legal entity separate from its owners. It can transact business and represent the company of its own.

Expanded access to Capital: A limited liability company can pool a big capital required for the business through issuing shares to the public.

Separation of ownership and management: The management of the company is taken over by the professionals, separate from the owners.

Sustainability: The existence of the limited liability company continues for a long period of time and does not wind up with the death of any shareholders unlike partnership.

Easy transferability of ownership: In limited liability company, the ownership is transferred easily through buying and selling of shares in stock exchange.