FRL 302 Discuss fully questions in I, and II, and then choose e Clare explains t
ID: 2799528 • Letter: F
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FRL 302 Discuss fully questions in I, and II, and then choose e Clare explains to you that in 2001 she and her sister, baby clothes. Clare was to spend most of her time producing the c business $50, FINAL EXAM ESSAY 000 in cash. Th They either III. or IV, respondll anticipated they would need at least $100,000 to begin the business, and eac ey envisioned that the business would generate enough income for the t then be able to sell the business for enough cash to live on during retiremen Ophelia, decided to go into business together making and selling clothes. Ophelia was going to focus on managing the 1. They were uncertain whether the business should take the form of a general p deci limited liability company, or a corporation. Compare and contrast the alter the preferred form, explaining why. h was willing to contribute two to live comfortably, and ld take the form of a t. partnership, a limited partnership, a alternatives, and make a recommendation as to 9, Inc.," stating in the Articles of Incorporation fo nol children." TheExplanation / Answer
To take the decision on the form of business for Clair and Ophelia, I will discuss the nature of each type of the business.
1. General Partnership: The general partnership is an agreement between the partners to jointly have unlimited liabilities, and that their personal assets would also be laible if required to fulfill any obligations. This makes this form of partnership a very dangerous for the partners if the company goes into losses or has high amount of debt. This meants each partner shares equal amount of liability and equal amount of profit. Each partner is required to contribute something in the partnership. It can be skills, funds, labor or any kind of involvement with the business In our case if both the sisters decide to go with this type of pertnership, then they would have contributued capital of $50,000 each and labor, and skills to run the business. One big advantage is that according IFRS the partners profit is not directly taxed, so the business profit can directly be used as the income for the partners without being seperately taxed for that. In this the partners can also decide the time period for which they want to be partner, and if this is not mentioned then death is considered the termination of the partnership. It is one of those partnership, which is easy to start, and without much cost. It can also be easily trasnfered as well.
Limited Liability Partnership: As the name suggest, the partnership where each partner has limited amount of liability towards the business. Unlike genral partnerhsip, each partner's personal assets are not liable to be used to fulfill any obligation. Every company if using this partnersip shall use LLP at the end of the name. The life of the partnership is not effected by the death of the partner, insolvency or retirement of the partner. The partners can easily transfer their ownership One of the biggest advantage is that it is not taxed under various haredings like dividend distribution. LLP also does not have any restriction on the number of members whcih can be added. These partnership can not raise money from public, and the act of one partner can bind the other partner as well.
Limited Partnership: A limited partnership is similar to a geenral partnership, with only one major difference being that out of the two partners one has to be a general partner and other has to be a limited partner. The limited partner will be considered as a silent partner that can make investment but won't have the voting right. Just like limtied limited liability partenrship, the personal account of the partners shall be protected. Like in the case of general partners the profit is not taxed seperately it is allowed to be passed to the partners. The general partner will have thte complete management control over the company. In context to the current scenario it would not be suggested for Clair and Ophelia to get under this type of business as both are handling a part of the business and it would not be right for one to be a silent partner with no say in the operation of the business.
Corporation: A corporation is bascially a seperate entity from the proprieters. It will have all the leagal rights of an entity, and can exist perpetually. Once a corporation is formed, stocks are issued for the capital invested in the company to each investor, and they become a stockholder in the company Each year the directors will elect a president, secretary, and a tresurer to handle the working of the company. Each year annual shareholder meeting would be required to be taken, Under corporation the company files its own tax, and the salary paid to the employee is deductible fromt the tax. on the other hand the dividend if distributed will be taxed at corporate level, and dividend level when distributed. This can also shield from tax. It does not allow conflicts between the partners to affect the busienss, as the company is a seperate entity it will contibue to work. The corporation limits the liability of the share holder from the obligation, If the corporation becomes big enough to sell its share to the public, it will have to register itself with SEC. Otherwise a company can also issue shares to small number of people under private offering exemption as well. In our case one big dissadvantage is that the profit is double taxed. Usually the owners increase their salaries to wipe out the profits, whcih could impact the valuation of the company when sold. In short term it could be very good but not in long term .
If the intention is to have continues earning, and then sell the business then general and limited liability partnership is apt. The difference will come in term of liability. general will expose to the obligation with their personal assets as well. To begin with Clair and Ophelia should begin the business as limited liablity partenrs, as their roles are defiend it will also avoid any conflicts which may arise if there is an impact on the business due to any lapse in any one of theri role. Also, as it is a startup this will shield theri personal assets from being used to fulfil any obligation in case of debt recovery. The company will also continue even after any misshappening with any one of the partner as well. Once the business is at a stage where they are getting regular income, they can convert to a general partnership to sell the company further. As LLP is not an attractive option for many of the investors. This shall give them a good value for the sale as well with whcih they can retire.
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