Selecting a suitable form of business is vital to the sustainability or the failure of a business enterprise. The main types of businesses include partnerships and corporations. A partnership is a collaboration of two or more persons to operate as co-owners of a business for profit. The main characteristics of a partnership are a collaboration of two or more persons who are the owners, sharing of profits, liabilities, and assets by the partners. On the other hand, a corporation can be termed as a chartered organization with several legal rights acting as a separate entity from the owners. Corporations are classified as S-corporation and C-corporation. C-corporation is the most common where shareholders are subjected to personal tax and dividends received where’s in S-corporation, shareholders report their business income and liabilities in their tax returns. Elaborate information on the merits and demerits of partnerships and corporations will allow Donna Rinaldi, Rich Evans, and Tammy Booth settle on the right option for their business.
Advantages and Disadvantages of Partnerships
It is easier to form partnerships since they have fewer expenses and formalities. Partnerships are flexible because they can operate different lines of businesses. Partnerships are also keen in managing business operations as they are aware of the risks they bear because of being unlimited (Ang, Cole & Lawson, 2010) . In partnerships, there is keen supervision and promptness in making decisions because of frequent meetings. There is low management cost in partnerships, high levels of secrecy, and minority protection. Equally, partnerships face the risk of conflicts and instability. Funding is also an issue in partnership and a lack of public confidence.
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Advantages and Disadvantages of Corporations
However, for corporation owners have limited liability as they are protected from liabilities and debts. It is easier for capital to raise funds through the selling of stocks and bonds. It is easy for ownership to be transferred through the sale of stock (Ang, Cole & Lawson, 2010) . Also, corporations have continuity, and owners can be entitled to tax-free benefits such as insurance deductions. One main disadvantage of corporations is there strict management structure, which means they need to have a management structure in place who will manage the operations and decision-making processes. Also, the owners have limited rights.
Recommend Which Option They Should Pursue
The decision between a partnership and a corporation is vital to Donna Rinaldi, Rich Evans, and Tammy Booth as it will affect their access to capital, tax burden, legal exposure, and the management structure. They should think through how best they can minimize taxes, maximizing capital, and weighing on legal risk.
For Donna Rinaldi, Rich Evans, and Tammy Booth, a partnership might be the best because each owner will have an opportunity to give their input in the operations of the business. Also, a partnership has low management cost, unlike corporations which have a complex management structure. The fact that partnerships have close supervision will help their company realize their objectives.
Major Differences between Equity and Debt Financing and Effect on the Business
Equity and debt financing are some of how companies finance their operations and growth. One major similarity in the two financing options is that they provide the company with capital (Mande, Park & Son, 2012) . Equity financing entails increasing the shareholder’s equity of a sole proprietorship to acquire an asset (Ng, Ding & Yip, 2013). When a corporation issues more shares of common stock, it increases the number of issued and outstanding shares, which reduces the percentage ownership of previous shareholders.
On the other hand, Debt financing entails borrowing of money to finance the acquiring of an asset. Debt financing allows stakeholders to maintain their share in the company since there is no issuance of new stock (Mande, Park & Son, 2012) . Debt financing has strict conditions which if not met, can lead to severe consequences. For instance, debt financing may affect the future of the business between Donna Rinaldi, Rich Evans, and Tammy Booth because the saving from the income tax will partially be used to offset interest expenses on the debt.
References
Ang, J. S., Cole, R. A., & Lawson, D. (2010). The role of owner in capital structure decisions: an analysis of single-owner corporations. Journal of Entrepreneurial Finance , 14 , 1-36.
Mande, V., Park, Y. K., & Son, M. (2012). Equity or debt financing: does good corporate governance matter? Corporate Governance: An International Review , 20 (2), 195-211.
Ng, I. C., Ding, D. X., & Yip, N. (2013). Outcome-based contracts as new business model: The role of partnership and value-driven relational assets. Industrial Marketing Management , 42 (5), 730-743.
