Legal relationship

• What are the advantages and disadvantages of incorporation, compared with remaining a partnership?

• What is the legal relationship between the shareholders, directors and officers in a company?

• What portion of the total equity belongs to each partner in the new company? Will the partners be happy with this if they expect the same profit-sharing ratio as in the partnership?

• Given that it will cost $300 in legal fees to form the company, how should these legal fees be recorded in the company’s accounts?

• How would the balance sheet of the company appear immediately after registering and taking up the loan from Western Bank?

• How much profit before income tax and interest would the company have to earn in the first year in order to achieve a rate of return on total assets (net of depreciation) of 15%?

• Assuming an income tax rate of 30% on profit, how much profit would this represent for the shareholders after interest and after tax?


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