Question 1

Arnold and Bella, who are friends since university days, wish to set up a business selling groceries online. Arnold and Bella had both graduated with an Accountancy degree several years ago, and had studied about incorporation and business organisations. Arnold and Bella want to avoid the risk of personal liability arising from the proposed business as much as possible. Arnold owns his own home, and Bella rents an apartment. Arnold and Bella will each invest $20,000 and $10,000, respectively, into the business. Both of them want to be active in running and managing the business. Arnold and Bella also would like minimal hassle in dealing with paperwork arising from the running of the proposed business. They have in mind the following forms of business entities: general partnership, limited liability partnership, and company.

Arnold and Bella are unsure of the form of business entity to adopt, and have come to you for advice.

(a) Describe the advantages of incorporation.

(15 marks)

(b) Select the form of business entity that is most suitable for them. In your answer, you should consider the extent to which their liability for debts will be limited; the degree of management and control they will each be able to exercise in the business; and the formalities in maintaining the entity and public disclosure requirements.

(55 marks)

(c) State your reasons why the other two business entities are not as suitable as the one which you have chosen.

(30 marks)

Cite relevant statutory provisions and/or case law to support your answer. You are NOT required to discuss limited partnership in your answer.