(Question and Answer): “Solve The Dilemma: To Incorporate or Not to Incorporate,” found on pp. 145-

Expert Answer

Situations those are suitable to incorporate:

  • When you want limitless business life – when you want to set the sky as your only limit – so you can grow your business using the core competencies of both the partners
  • Shares can be transferred for a mutual benefit:
    • Can use the provision on the back of the share certificate to include a beneficiary
  • Capital Raising ability – Capital Assets Portfolio Management (CAPM) Cite: Investments – by Authors Zvi Bodie and others
  • Limited Liability – as a firm, you will be protected from law suits and litigations to a certain extent – once your company becomes a limited liability incorporated company, you, as one of the share holders has a shared liability. E.g. John opens a proprietary (Sole proprietorship self employed) software consultancy firm (John Alan Consultancy) – he develops and installs an accounting package for Target stores – due to some bugs in the software, the accounting figures went wrong and if Target sues John, he will be 100% liable to repay Target for the damages – having taken the lessons, John finds 99 partners, share holders and raises his small firm to a limited liability corporation or incorporated – now including John there are 100 partners – each of them invests $10,000 – the total share become $1,000,000 = $1 million – let us rename them as “Jew Jersey Software Solutions” (NJSS) and they become an incorporation and get listed in the NY stock exchange as well; they start selling equity shares to public as well; So the $1 million capital may rise further;
    • With this, they supply the same accounting software to the same Target chain stores – as history repeats itself, the same bug happens again – and Target sues the NJSS and court sentences that NJSS must pay $100,000 as a compensation to Target
    • Here John is liable to pay just $1000 (one hundredth of the total litigation suit) – hence limited liability and John is saved from the total damage as his other 99 partners shares the liabilities – this is the advantage of incorporating – so you may incorporate when your business may attract risks and law suits

Situations those are not suitable to incorporate:

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  • If your business does not face the risk of law suits, you need not incorporate
  • If you want to enjoy the personal tax credits, (say in the above case, John Alan consultancy will be taxed just 25% on a personal tax bracket but, the NJSS will be taxed 50% on a corporate tax bracket) – hence do not incorporate if you want to enjoy the tax benefits
  • And also if you do not to keep on paying fees every now and then like lodgment fees for lodging the incorporation articles, and the ongoing fees from the government;
  • Remember the International Business Machines (IBM) user manuals – you will see blank pages between each chapter – but labeled as “This page intentionally left blank” (as if the readers do not know! – funny!!)
    • If you want to change a single line of source code, you need to write at least 4 pages of explanatory documentations – too much paper work and over heads
    • this applies to the corporate governance as well – NJSS must keep record of every sale, ledger, journal, trial balance, balance sheet, profit and loss statement, and publish them on their web sites – share holders may need to be couriered a printed copy of their annual report as a book – so if you want to avoid all these book keeping expenses, then do not incorporate

Now the question said “the case found on pp 145 – 146” – but the case is not given – the search gave few results, but they are not very relevant – one result was suffocating mothers by Shakespeare – but less likely to be relevant to operations management

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