 In this discussion, we will discuss the discussion question of describe the pros and cons of a corporation form of business versus a partnership. So if we see an essay question like this, we are really just looking at the characteristics of a corporation and it's really helpful when we think about a corporation to compare and contrast it to other types of business entities. So we could think about, you know, the pros and cons, we could think about the similarities and the differences. Note that when we look at different types of business entities, we are of course considering those things that differ. As we do that, remember that a lot of the things are the same where it's these are business entities. The things that will remain the same is that the entity is there in order to generate revenue for the owners. So most of the record-keeping is going to be much the same. Most of the transactions, the day-to-day transactions, much the same. What we want to do, however, is focus on those areas that differ. If we look at a corporation versus a partnership, the areas that differ is the form of ownership, the equity section in terms of the financial statements. The major reason, the major component or thing that differs in terms of the financial statements is going to be that the corporation is a separate legal entity, whereas the partnership is a general partnership, at least, is not. And that's going to be the major kind of innovation, the major benefits that kind of drives all the other good things about a corporation and some of the bad things about a corporation is that it is a separate legal entity. In other words, it's going to be something that we're going to give rights to. So we give rights to a corporation that typically are going to be human rights that we only give to individuals. The right to own property and the rights and some of the obligations that will go along with that, which is that they're liable as well. So if they get sued or something like that, we're suing the corporation. So the corporation is kind of like a person in some ways. They have been attributed human characteristics, whereas a partnership in a sole proprietor or a partnership in this case has not. So that means that the partnership, and this is a little tricky because from a bookkeeping standpoint, we always keep the books separate. We track the books separate from the from the business. We're going to do that with a partnership. We're going to do that with a corporation. But for a partnership from a legal standpoint, if you sue the partnership, you're still you still can go after the partner's personal assets. Whereas if you sue the corporation, typically you can only go after generally the corporation. And that's one of the big benefits there of a corporation. You have that liability protection, one of the huge benefits that really stems from the corporation being a separate legal entity. Another benefit from from a corporation as compared to a partnership because of this separate legal entity component is that they can often generate more capital through initial investments. Meaning, like even if it was myself or someone else that is just an individual wants to invest some of their little money into the corporation or very wealthy individuals that want to invest in a corporation. They can do so without having to know too much or be involved in the day to day operations of the corporation. We can invest equity interest without having to know too much because the corporation, if they were sued, cannot go after our personal home or something like that typically because they are a separate legal entity. And therefore a corporation, because of that liability protection, can generally sell equity interests, stomachs in the corporation, generate revenue much more easily than say a general partnership. If we are a general partner in a partnership, then we're going to have liability in that as well. So it's a little bit more difficult to get that equity interest oftentimes. One of the problems with a corporation versus a partnership is that because it's a separate legal entity, it owes taxes. It's going to be taxed at the corporate level. That's typically considered a problem because when we're taxed at the corporate level, we often end up with double taxation. We typically end up getting taxed twice. Why? Because really, again, who are the owners of the corporation, the stockholders? So they're the ones that are ultimately being hurt by a tax, whether it's on the corporate level or on the individual level. If we have a sole proprietor or any type of business, remember the goal, generate revenue and then get some of that revenue from the business, drawing it out. If we're a partnership to the capitals, draws are not going to be taxed because the income of the partnership is taxed on the individual tax return. The draws aren't affecting net income and those aren't going to be taxed. Just the net income, what has been earned will be. From the corporate level, the corporation is going to pay tax on net income. It's not going to be taxed on the individual level. It's going to be taxed on the corporate level. That's a file, a return and pay taxes. Whereas the partnership has the file returns in order to know how much to flow through in the form of a K1 to the individual returns who then pay taxes on their individual taxes. The corporation files a tax return, pays the taxes on the corporate level. Then when the corporation distributes the money to the shareholders, it's called a dividend and the dividend is also taxed. So it's the same revenue. It got taxed twice because dividends are currently a taxable event. So that's one of the major drawbacks of a corporation is that you're typically going to have this double taxation. Another difference between a partnership and a corporation is that the partnership has this kind of mutual agency issue. Meaning if you have two partners, they both can bind the partnership into contract. And when they do that, they bind the other partners into contract, which could cause problems for them if it wasn't a good contract or and it could expose them in terms of personal liability as well. Whereas a corporation, because the stockholders are typically a step removed, you can think of a large corporation at least that the stockholders would vote for the board of directors. Who would then hire management. And so you don't have all the corporate stockholders aren't really involved in the day to day operations necessarily. They're a step removed. So you don't have that mutual agency. There still is an agency problem, which is kind of a con because the stockholders, if they are step removed, if I own some stock and say Google, I vote for the board of directors. I don't have any direct control over the operations of the company. I'm just kind of investing in the company. I can vote for the board of directors who can then hire management, who can then make decisions who hopefully are making decisions on behalf of myself. But of course, management has their own, you know, their own objectives for their own personal objectives. And so there is an agency problem there as well, meaning is management making decisions that are totally optimal solely for the stockholder? Or are they making decisions that could be beneficial to themselves as they as they make decisions for the company? So there's still kind of an agency problem, but it's a different type of agency problem than you'd have for a partnership. One of the benefits of a partnership type of entity is that you got that you can have really flexible type of plans in terms of the distribution of net income. Meaning it's not like every partner has to get a 50 if there's two partners, it's not a 50 50 split necessarily. It's not a it's not a one third split for each of the partners necessarily. We can do a lot of creative things to have the partnership distribution of net income be in compliance with what we think is fair. Just like if you had two people that moved into a new apartment or something like that and the roommates, if one bedroom is bigger than the other bedroom, we can compensate for that somehow that we can have different payments of rent. The rent doesn't have to be paying 50 50. We can have different split of chores that doesn't have to be done completely even. You don't have to have to you don't have to line the dishes up, you know, 50 50 so that each does the same amount of dishes. Right. So the same is true for a partnership. We really have a lot of flexibility. We can if one partner puts in more time, as long as everybody's OK with that, then we're just going to maybe allocate them some kind of salary distribution, give them more of the income. If someone puts in more money, then that's OK. Maybe we compensate for that by giving them some kind of return on their capital investment before we allocate the net income. For a corporation, we still have some flexibility, but not near as much as as kind of a partnership. Because remember, corporation owners are typically owned with common stock and the beauty of common stock is that it's all the same. So one individual could be distributed more stock, which means they would get a higher, you know, benefits from honing more stock. So they would get a higher allocation of any kind of dividends based on the number of stock. But you can't you don't have the same kind of flexibility in terms of given a given a different types of income allocations based on if they put more time in or if they thought more about that kind of stuff. The partnership is pretty flexible in terms of how to allocate the income. The partnership can also have more flexibility in determining how much they want to draw out. Not every partner needs to draw out as much money. Not every partner needs to invest as much money in a corporation. Again, that the dividends are the things that are going to be given out. And you can't give a dividend to just one stockholder. You got to give it to everybody. So that's a little bit more restrictive. It is possible for one person to have a lot more stock and therefore get a much higher portion of the dividend based on having more stock. But again, there's there's kind of some constraints there in terms of how much, you know, you decide to distribute to the owners of the corporation as compared to a partnership.