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Benefits and Risks of Incorporation

Nicola and May are partners in a business which operates a second-hand bookshop. They have two employees working for the business. The shop is located in leased premises. The business is doing well and has been profitable for them.

An opportunity has arisen to purchase two second-hand book shops in nearby suburbs. Nicola and May are keen to expand their business. They will need a large injection of funds to purchase the additional businesses. They will need to appoint a manager to at least one of the shops, as they will be fully occupied by the other two.

Nicola is concerned about her potential liability for the debts and liabilities of the partnership. Also, she is concerned about the future of the business if one of them should decide to leave, as the lease is in both of their names.

Advise Nicola on the advantages and disadvantages of incorporating. If you recommend incorporation, what form of incorporation would be the most appropriate? Why?

Solution Preview

If Nicola is concerned about potential liability for debts and liabilities incurred because of the business partnership then she should incorporate. Incorporating a business protects shareholders from debts or litigation. The two owners of the business Nicola and her business partner will become members of the corporation and possess protection from lawsuits and other liabilities attributed to the corporation, which will be separate from the owners. In addition if the partner was to leave, she could easily replace the partner if he chose to sell his shares and the corporation would continue with new ownership. These are some of the advantages that Nicola could ...

Solution Summary

This solution gives students the many benefits and risks that companies have to weigh before deciding upon becoming incorporated.