Tutorial Questions – Topic 1

1. Discuss FIVE (5) factors that need to be considered in deciding the most suitable type
of business entity for a particular business? (10
marks)
 TAX TREATMENT
Many businesses are irritated by double taxation. As a C Corporation,
your company's revenue is subject to state and federal taxes, but you
must also pay taxes on your personal income from the company.
 ABILITY TO RAISE CAPITAL
Important for any business, how you raise capital is heavily regulated,
depending on the business entity you choose. While C Corporations
provide the most flexibility, raising capital as a partnership is subject to
particularly stringent rules. An S Corporation has some of the flexibility
of a C Corporation, but its number of shareholders is limited to 100.
 SEPARATION OF OWNERSHIP AND MANAGEMENT
Personal liability is a major concern for business owners. Several entities,
such as corporations, limited liability companies, and limited
partnerships, separate ownership from management and thus protect the
business owner from legal action (barring any action that might pierce
the corporate veil).
In contrast, sole proprietorships and general partnerships expose the
owner to being held personally liable for management decisions.
 LIMITED LIABILITY PROTECTION
Just as you do not want to be held personally liable for a lawsuit filed
against your company, your personal assets must be protected from
potential business liabilities.
 TRANSFERRAL OF OWNERSHIP
 Transferring ownership of a business in a C Corporation or a S
Corporation is relatively simple because ownership is based entirely on
the shares held; the owner only needs to sell their stock to the new owner.
2. Read the following situations and determine the most suitable type of business entity
for them. Also explain to them on the procedure to set up the said business entity: -

a. Devipriya knows how make very delicious maruku and her maruku always
received praise from her friends and family. She would like to set up a small
one-person business to sell her maruku (5
marks)
Sole proprietorship, a sole proprietorship requires only one owner, who
has unlimited liability. If the company is declared bankrupt or in debt,
the owner's personal income or assets are not protected.
b. Azri and Ismail are both accountants. They intend to open up an accounting
firm called ‘AI Malaysia’ (5
marks)
Partnership, A partnership has two or more owners and a maximum of
20 owners.
c. Ming Hock wants to open up a business selling furniture. He already has 15
people/companies interested to invest in his business. He plans to sell most of
the shares in the business to these 15 people/companies (5
marks)
Limited liability partnership, A limited liability partnership combines the
characteristics of a partnership and a company. It is a body corporate and is a
separate legal entity from its partners.