Q1SE_2 - Horngren'S Financial And Managerial Accounting

Question

Question - Describing corporation characteristics

Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner, wants to protect his personal assets in the event the restaurant is sued.

Requirements

2. What are some disadvantages of organizing as a corporation?

Step-by-Step Solution

Answer

Answer

Corporates are obliged to pay double tax on its earnings and there might be conflict of interest as the ownership and management are not in the same hands. The incorporation process is expensive and complex.

Step 1: Basic introduction-

Corporation is considered as a legal entity that is distinct from its owners and have its separate existence in the eye of law. It possesses similar rights and responsibilities as an individual may have. 

Step 2: Disadvantages of organization as a corporation-

The corporation's revenue is subject to double taxation.

Ownership and management are separated as shareholders are the owners and directors are the managers.

Compare to other business forms the start-up costs are higher.