Book 1 - Chapter 28

11.		A small dress shop in a mall probably would not need to incorporate.
		A small chemical manufacturing company would want to incorporate. This type of business has a great deal of potential personal liability because chemicals can be hazardous materials. If the owners become stockholders in a corporation, they will not have personal liability, unless they act negligently or violate laws.
		A chain of stores probably wants to grow and will need cash to do so. Corporations have the ability to obtain a large amount of investment capital by selling shares of stock.
		A partnership has the features of mutual agency and personal liability. One partner can potentially create a business liability that affects all the other partners and that also creates personal liability. A corporation could eliminate the mutual agency and personal liability. An LCC entity might be another good option.
		A company that wants to expand needs cash. This is particularly true of companies that do a great deal of research, such as a biotechnology company. Incorporating the business may be an attractive choice. A corporation has the potential to raise large amounts of investment capital. Limited liability may also be an issue.

12.

Yes, an owner (stockholder) of a corporation can also be an employee of that corporation. This
is possible because a corporation is a separate legal entity, apart from the individuals who are
stockholders. An owner of a proprietorship or a general partnership cannot be an employee
because there is no legal distinction between the business and the owner. In these cases, the
owner has the final legal authority and responsibility for all business matters. In effect, because
they are already the owners, they cannot “employ themselves.”

13.

Corporation	Limited Liability Company
Owners purchase shares in the entity.	Owners purchase percentage interests.
Limited liability	Limited liability
No mutual agency	No mutual agency
Owners’ income and loss is based on shares owned.	Owners’ income and loss is allocated based on the operating agreement.
Double taxation	No double taxation
Unlimited life	Limited life
Professional management/board of directors	Can be professionally managed or member managed
Articles of incorporation	Articles of organization
Bylaws	Operating agreement
Owners are called stockholders or shareholders.	Owners are called members.

14.

Advantages: Limited liability, ownership in shares, transfer of ownership and no mutual agency.
In general, a corporation insulates the owners from responsibility and makes it easy to own and
transfer shares. Disadvantages: Double taxation and government regulations. (However, keep in
mind that regulations are designed to protect the community and the environment.)

Learning Goal 28, continued

SOLUTIONS

Section VI · Corporations

Home

Home || Book Publications || Professor’s Office || Student Info & Resources || Useful Links

Worthy & James Publishing is a provider of basic accounting books covering fundamental accounting principles, business accounting, and business math. Topics in financial accounting and business accounting covered include the balance sheet, the income statement, financial ratios, and bank reconciliation.