sole proprietorships
...e value of their stock. Advantages and Disadvantages Converting to a corporation has both advantages and disadvantages. The following shows the advantages. First, a corporation has the easiest way to gather larger amount of money to support the firm. Second, the corporation has a life apart from owners, therefore, the stockholders /owners have limited liability, which means stockholders’ losses are limited to the value of their stocks. Third, a corporation needn’t close its door upon ownership changes. Lastly, a corporation is taxed and sued in the form of a single person. However, converting to a corporation also has its disadvantages. Since the typical stockholder of a large corporation owns only a small fraction of the shares, a stockholder has a limited ability to influence voting for a board of directors. Tax policy also is a disadvantage for the corporation. Corporation income is taxed twice: one tax for corporation income, the other one for stockholder income. The Equity Section of the Balance Sheet Now, let’s take a look at the changes of owner’s equity section of the balance sheet. In the balance sheet, the owner’s equity of a sole proprietorship is Capital. It is listed as the owner or owners’ names followed by the word “capital”. On the other hand, the equity of a corporation is stockholders’ equity. It comes from two main sources: the paid-in capital and the retained earnings. The paid-in capital is listed as common stock, preferred stock. The equity owners of business only get what remains after the creditors have been paid. The Various Accounts in the Stockholder’s Equity As mentioned in the above section, the stockholder’s equity consists of three accounts: common stock, preferred stock and retained earnings. What’s the purpose of these accounts in the Equity? In fact, common stock and preferred stock are considered as paid-in capital in the stockholders’ equity. If a corporation has only one class of stock, the stock is called common stock. Common stock represents partial ownership of a corporation. Shareholders have voting rights, and the stock has more potential for appreciation than preferred stock. The preferred stock, on the other hand, has preference over common stock in the payment of dividends and the liquidation of assets. It has specified dividends of rate. Retained earnings are actually reinvested earnings in the stockholders’ equity. They are generated from a company’s operations. They represent a corporation’s accumulated net income that has not been distributed to stockholders as dividends. Comparison of Stockholders’ Equity Accounts and Sole Proprietorship Capital Accounts Let’s examine the sole proprieto...