Business Organization

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University of Virginia

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Explain the legal concept of limited liability to Jaffe and Jordan

Limited liability is a legal protection that cushions business owners’ personal assets in case of

business failure. The risk of economic loss is only limited to the amount invested by the owners

in the business. This means that the risk of a business failure is placed on its creditors.

Give 2 advantages and 2 disadvantages of each of the following forms of business

organization to Jaffe and Jordan:

Partnership

Advantages

• The partnership allows risk sharing. In case of business loss, the burden is shared

between the partners equally. The burden on each partner will be much less unlike for the

sole proprietorship where the proprietor bears the entire loss.

• The partnership has more resources at its disposal. As the partners come together, they

contribute more capital, put more effort and time to ensure success. This means that

partnership has a pool of more resources, unlike the sole proprietorship.

Disadvantages

• It has no legal entity separate from the owners; hence the partnership comes to an end in

case of death, insolvency, incapacitation or voluntary retirement of any partner.

• Partnerships have unlimited liability. This implies that the partners are liable for firm’s

debt to an unlimited extend, thus they can be forced to pay firm’s debts from their private

assets.

Limited liability

Advantages

• Limited liability firms exist as a separate legal entity hence the business owners are

protected from being held personally liable for the operations and debts of the firm.

• Limited liability firms have a tax advantage. They can avoid double taxation because the

income of the business is treated as the income of the owners. There is no corporate

taxation, but the members pay tax as personal income tax.

Disadvantages

• Although LLC can avoid double taxation, their profits are subjected to social security and

Medicare taxes thus they may end up paying more taxes than the corporation.

Corporation’s salaries and not profits such taxes.

• Governing regulations for LLCs vary from state to state. Some states require LLCs to

produce reports, pay filing fees, and franchise tax either annually or semi-annually.

Moreover, some countries treat the U.S LLCs as corporations, where they are required to

pay corporate taxes.

Corporation

Advantages

• Corporations have the ability to raise more resources for their business. For example,

they can raise equity by selling ownership interest through Initial Public Offering (IPO)

during the formation or even later in the life of the corporation.

• Corporations are treated as separate and distinct from the owners. Therefore, the owners

of the corporation are not liable for the debts in case if business failure. They are limited

to the amount they invested in the corporation.

Disadvantages

• It is costly and time consuming to start a corporation. They are mostly regulated by

federal, state, and even local agencies, and this implies that there is increased paperwork

associated with formation of corporations.

• Corporations are subjected to double taxation. The corporation tax is charged on the

company’s profit and again on the shareholders when they receive dividends.

Ultimately, what form of business organization would you recommend Jaffe and Jordan to

consider. Why?

I would recommend Limited Liability because it is treated as a separate entity and the members

are not personally liable. With LLC Jaffe and Jordan can avoid double taxation.

Based on your recommendation above, explain to Jaffe and Jordan if the following sources of

raising long-term capital are appropriate for them:

Angel investors (angels)

Not appropriate because they provide financial backing in anticipation of ownership equity in the

company

Crowdfunding

Appropriate because it is relatively easier to obtain than the bank loan.

Venture capital

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Explain the legal concept of limited liability to Jaffe and Jordan Limited liability is a legal protection that cushions business owners’ personal assets in case of business failure. The risk of economic loss is only limited to the amount invested by the owners in the business. This means that the risk of a business failure is placed on its creditors. Give 2 advantages and 2 disadvantages of each of the following forms of business organization to Jaffe and Jordan: Partnership Advantages • The partnership allows risk sharing. In case of business loss, the burden is shared between the partners equally. The burden on each partner will be much less unlike for the sole proprietorship where the proprietor bears the entire loss. • The partnership has more resources at its disposal. As the partners come together, they contribute more capital, put more effort and time to ensure success. This means that partnership has a pool of more resources, unlike the sole proprietorship. Disadvantages • It has no legal entity separate from the owners; hence the partnership comes to an end in case of death, insolvency, incapacitation or voluntary retirement of any partner. • Partnerships have unlimited liability. This implies that the partners are liable for firm’s debt to an unlimited extend, thus they can be forced to pay firm’s debts from their private assets. Limited liability Advantages • Limited liability firms exist as a separate legal entity hence the business owner ...
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Tags: Jaffe and Jordan Limited liability legal protection risk of economic loss business owners personal assets