Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_1_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox. Chapter 1 (page 19)
1. What is the most important difference between a corporation and all other organizational forms? Corporations has unlimited life time and limited liabilities and also has real entity and legal entity, because any stakeholder can sue against the corporation. Financing is very easy for investment in corporation. On the other hand, all other organizations have limited life span since it is directly owned by one person or partners and also have unlimited liabilities. Investment is very difficult since self-finance.
2. What does the phrase limited liability mean in a corporate context? Stakeholder’s liability is limited to the amount they invested in the corporations. Stockholders are not responsible for any encumbrances of the company specifically; they cannot be required to pay back any debts incurred by the firm. Therefore, anything that diminishes a property’s worth or makes it less useful or enjoyable; is not responsible by the owners in corporate context. 3. Which organizational forms give their owners limited liability? Corporations
4. What are the main advantages and disadvantages of organizing a firm as a corporation? Corporations are probably the dominant form of business organization in the United States. A corporation is a legal entity doing business, and is distinct from the individuals within the entity. Public corporations are owned by shareholders who elect a board of directors to oversee primary responsibilities. Along with standard, for-profit corporations, there are charitable, not-for-profit corporations.
Unlimited commercial life. The corporation is an entity of its own and does not dissolve when ownership changes. Greater flexibility in raising capital through the sale of stock. Ease of transferring ownership by selling stock.
Limited liability. This limited liability is probably the biggest advantage to organizing as a corporation. Individual owners in corporations have limits on their personal liability. Even if a corporation is sued for billions of dollars, individual shareholder’s liability is generally limited to the value of their own stock in the corporation.
Regulatory restrictions. Corporations are typically more closely monitored by governmental agencies, including federal, state, and local. Complying with regulations can be costly. Higher organizational and operational costs. Corporations have to file articles of incorporation with the appropriate state authorities. These legal and clerical expenses, along with other recurring operational expenses, can contribute to budgetary challenges. Double taxation. The possibility of double taxation arises when companies declare and pay taxes on the net income of the corporation, which they pay through their corporate income tax returns. If the corporation also pays out dividends to individual shareholders, those shareholders must declare that dividend income as personal income and pay taxes at the individual income tax rates. Thus, the possibility of double taxation.
5. Explain the difference between an S corporation and a C corporation. The “S” corporation has the unique feature of passing its income through to its owners, so that the entity itself does not pay income taxes. The owners report the income on their tax returns, thereby avoiding the double taxation that arises in a regular “C” corporation, where the business is taxed on its income, and then the investors are taxed on the dividends they receive from the corporation. In addition, every shareholder of “S” corporation must be a United States resident or citizen.
A “C” corporation or a partnership cannot be a shareholder, though estates and certain trusts and charities can be investors. In “S” corporation there can only be a single class of stock, which prevents preferential payments and voting privileges. Also there are limited shareholders in S corporations which is not more than 75 but in C corporations there are unlimited shareholders.