Chapter 12, Problem 1DQ

To determine

Explain the main advantages of the following:

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

Explanation of Solution

Proprietorships: Proprietorship is a form of organization, which is owned by an individual, called proprietor. The most common proprietors are lawyers, physician, 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.

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

1. 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.
2. The main advantages of Partnership are:
• Moderately complex to form: It is formed with a partnership agreement, so moderately complex.
• Non-taxable entity: This entity is not taxed for federal income tax purposes.
3. The main advantages of Limited Liability Company are:
• Moderately complex to form: It is formed with an agreement among the owners, so moderately complex.
• Non-taxable entity: This entity is not taxed for federal income tax purposes, but the owners are required to file the individual members’ tax return.
• Expanded access to Capital: This entity is attracted by the investors to invest in the organization because of the limited liability.