aren and Yanique are opening a jewellery store with no competition in the area from which they intend to operate their business. Their fundamental decision is how to organize the business. They anticipate super-profits the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow and as such, they feel the corporate form of operation will be best for the long term. They seek your advice. Requirements: State three (3) of the main advantage they gain by selecting a corporate form of business now. Would you recommend they initially issue preferred or common stock? Why? If the corporation when formed sets a par value for its shares low and issue common stock for a price above par, what is this amount above par called? Can this amount be treated as a gain, income, or profit for the corporation? Please give the reason for your answer.
Karen and Yanique are opening a jewellery store with no competition in the area from which they intend to operate their business. Their fundamental decision is how to organize the business. They anticipate super-profits the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a
Requirements:
- State three (3) of the main advantage they gain by selecting a corporate form of business now.
- Would you recommend they initially issue preferred or common stock? Why?
- If the corporation when formed sets a par value for its shares low and issue common stock for a price above par, what is this amount above par called? Can this amount be treated as a gain, income, or profit for the corporation? Please give the reason for your answer.
1) Advantages of Corporate form of business.
(a) Easy to Raise Capital - In the corporation form of business, it is easier to raise capital as the company can issue common and preference capital and also can have the advantage of getting themselves registered on Stock exchanges.
(b) Liability - Liability of the owner is limited to the extent of shares held by the shareholders or the amount guaranteed by shareholders to be paid at the time of winding up of the company. Owners are not personally liable for the liabilities held by the company.
(c) Perpetual Existence - A company has a perpetual succession i.e. its existence is not affected by the death, lunacy, or bankruptcy of its members or shareholders.
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