Name: Eyad Sherif Dr.

Marwa Gamal

Intermediate Accounting

(Assignment 1)

Comparison between 3 Types of

Business Organization
Introduction:

When examining various forms of business organization, three primary structures emerge prominently: sole proprietorships,
partnerships, and corporations. Each of these structures possesses distinct characteristics, advantages, and disadvantages.

Sole Partnership Corporation

Proprietorship
A sole proprietorship is a A partnership is formed A corporation is a legal
Definition:
business entity owned and when two or more entity that is separate
operated by a single individuals share from its owners
individual. ownership and (shareholders), which
management provides limited liability
responsibilities of a protection.
business.

- Simplicity: Establishing a sole - Shared Resources: Partners - Limited Liability:

Advantages: proprietorship is can combine their resources, Shareholders are generally not
straightforward, with minimal resulting in increased capital personally liable for corporate
regulatory requirements. and a wider range of skill sets. debts, thereby protecting
personal assets.
- Control: The proprietor - Simplicity: The formation of a
maintains complete authority partnership is generally less - Raising Capital: Corporations
over decision-making complex than that of a can more easily raise funds
processes. corporation, facing relatively through the issuance of stock.
few regulatory obstacles.
- Tax Benefits: Profits are taxed - Perpetual Existence:
as personal income, often - Tax Pass-Through: Income is Corporations maintain
resulting in lower overall tax typically taxed only at the continuity independent of
rates. individual partners' tax rates, ownership changes, thereby
rather than at the business ensuring stability.
level.

- Unlimited Liability: The - Joint Liability: Partners may - Complexity and Cost:
Disadvantages: proprietor holds personal share personal liability for the Establishing a corporation
responsibility for all business business's debts, including involves more complexity,
debts, potentially jeopardizing those incurred by other requiring formal procedures
personal assets. partners. and incurring higher regulatory
costs.
- Limited Resources: Securing - Potential for Conflict:
capital may prove challenging, Disagreements among partners - Taxation: Corporations are
as funding options are typically can arise, potentially affecting subject to double taxation,
confined to personal savings or business operations. where income is taxed at both
loans. the corporate level and again
- Transfer Difficulty: The as dividends to shareholders.
- Sustainability: The business process of selling or
may encounter difficulties in transferring ownership can be - Reduced Control: Decision-
sustaining operations if the complicated and often making is often delegated to a
owner becomes incapacitated. necessitates partner approval. board of directors, which may
not always align with the
interests of individual
shareholders.

The selection of an appropriate business structure is contingent upon numerous factors, including
Conclusion: liability considerations, tax implications, and the desired degree of control. Each type of structure
presents unique advantages and challenges, which should be assessed in light of the entrepreneur's
specific circumstances and objectives.
Basic rights of stockholders of a corporation:

Voting Rights: Shareholders can vote on crucial matters and board selections.

Dividend Rights: Shareholders get a share of declared profits.

Right to Information: Shareholders can access company financial data and reports.

Right to Attend Meetings: Shareholders can join yearly and special gatherings.

Liquidation Rights: Shareholders can claim part of assets if the company shuts down.

Preemptive Rights: Shareholders get the first chance to buy new stocks to keep their stake.

Right to Sue: Shareholders can take legal steps to guard their interests.

Right to Transfer Shares: Shareholders can sell or give away shares unless rules say otherwise.

Preemptive rights are important because they:

Prevent Dilution: Ensure that the existing shareholders do not lose their ownership percent when new
shares come into existence.

Maintain Control: Enable shareholders to remain involved with the management of the business.

Preserve Investment Value: Secure the investment made by other shareholders in the current shares from
degradation.

Encourage Investment: Be able to assure investors of the future share Bought.

Enhance Market Confidence: Assure current investors of their goodwill which augments the confidence in
the company.

Offer Negotiation Leverage: Raise the bargaining power of shareholders in respect of future issue/
Financing.
Two categories of equity security that represent ownership interest in a
corporation are common and preferred stocks. However, these two have
distinguishing features as follows:

Common Stock:

Ownership Rights: As the owners of common stock, the common stockholders can voice their opinion on
company general meetings through casting votes. This enables them to handle limiting factors associated
with seat holders in company policy making.

Dividends: There is no assurance of payout when dealing with dividends for common stock. Because
dividends are always paid to preferred stockholders, common stockholders only get dividends regarding
company profits last.

Liquidation Preference: When a company goes bankrupt and liquidates its assets, common stockholders
recover last, after all common claims and all preferred stockholders have been settled. Within periods of
financial distress, common stockholders are more risky.

Growth Potential: With common stock, there is potential for the capital investment of investing through
the appreciation, where such appreciation comes with stock price alteration that comes with successful
performance by the firm.

Preferred Stock:

Fixed Dividends: Preferred dividends, by contrast, are normally guaranteed, and preferential stocks usually
have a steady rate preceding common stock dividends.

No Voting Rights: Preferred carton holders do not usually participate as voters; hence they have no say
regarding company governance policies.

Liquidation Preference: Who gets paid back before common stockholders in the event of liquidation, this
hierarchy is extremely risk averse because would only repurchase preferred stock and are always paid back
before repurchasing common stock.
The differences in paid-in capital and retained earnings should always be
examined closely for the following reasons:

Source of Funds: Investors make contributions to a company’s Paid-in capital while Retained earnings
are those profits that have been earned over years.

Financial Analysis: Evaluates the status and ability of the company to grow and the level of confidence
the investors possess.

Dividend Policy: A great amount of retained earnings suggest that the company would have the ability
to provide dividends in the future though the same cannot be said for the paid-in capital which affects
the structure of equity.

Valuation: These are treated differently by the investors in relation to seeking the value and risk
factors of a company.

Regulatory Compliance: Proper reporting of the concepts is very critical to the avoidance of any
misstatements and compliance purposes.

Tax Implications: Retained earnings is taxed but in the case of paid-in capital, it has no taxes until the
company pays out dividends.